It’s no secret that this year’s frenetic fundraising environment has put pressure on institutional investors’ already stretched private equity teams. Add to the mix the growth of the secondaries market and the increased number of sponsors exploring GP-led secondaries processes, and it’s easy to see why LPs feel they’re spread too thin.
“When that email pops into your inbox, it’s the last thing you want to see,” says the former head of private equity at one of the largest public pension systems in the US, referring to emails from sponsors notifying LPs of potential GP-led secondaries processes. Having to decide whether to sell or rollover your exposure to a private equity fund can require between 20 and 40 hours of work – time that many LPs don’t have, the former head says. “The default option is often an automatic sell, which seems like a pretty short fuse to me.”
A GP running a continuation fund process may face an LP base with divergent motivations and needs. LPs can range from pension funds with straight fund exposure to insurance companies that have co-investment exposure to the asset or assets. Further, a fund of funds typically must return capital to its own investors within a set time period and will therefore need liquidity at a specific time. Conversely, a sovereign wealth fund may be less concerned about short-term liquidity.
“By definition, every LP has their own set of criteria, their own strategic plan, their own allocation challenges,” says David Atterbury, managing director at HarbourVest Partners.
On top of this, some LPs may be active secondaries buyers with dedicated secondaries investment teams that have a vested interest in seeing a GP-led process go ahead, as this would allow it to participate in the deal as a buyer. CPP Investments, Singapore’s GIC and Los Angeles County Employees Retirement Association are examples of large institutional investors with dedicated secondaries buy-side programmes. Such LPs may have a very different view on pricing and on how a transaction is structured, compared with those who simply want to sell their LP stake at the highest price, or those who do not want the process to go ahead at all.
One way to address potential conflicts of interest within the LP base is to disallow limited partner advisory committee (LPAC) members who are conflicted from voting on a conflict waiver when a GP-led process is put to the group. An LPAC member with a dedicated secondaries programme may even proactively recuse itself from voting; such members are typically concerned about how they’ll be perceived in these transactions if they are potential buyers, says Alex Chester, a partner at Clifford Chance.
According to Faris Elrabie, managing director at Greenhill, the biggest difference between members of a fund’s LP base is usually the different levels of knowledge about liquidity options. Other LPs not as sophisticated may not have the resources to process the information given in a GP-led process and will simply sell its positions, he adds.
“The biggest point of misalignment between members of the LPAC and regular LPs is that the [differing] level of sophistication of the LPAC members potentially puts them in a better position to review these proposals,” Elrabie says, “They may be able to transact on something that they see as a really good deal.”