Fund restructuring comes of age

Successful GP-led secondaries transactions involving high-quality firms may herald the end of the fund restructuring stigma.

Secondaries buyers and advisors have been betting for several years that the market for GP-led transactions is soon to explode. However, they have struggled to make these types of deals attractive enough to limited partners.

According to UBS data, GP-led transactions as a percentage of total secondaries deals has been dropping year-on-year, from 28 percent in 2014 to 26 percent in 2016. While this isn't an earth-shattering drop, it's a far cry from the expansion that many predicted.

Now though, several high-profile GPs are taking full advantage of the secondaries market to manage their funds, which in turn could jump-start the GP-led transaction market.

BC Partners is currently waiting to learn which of the LPs in its ninth fund will take up a tender offer led by Lexington Partners. The deal has a stapled component to boost the firm's fundraising efforts for BC European Capital X. The ninth vehicle had a net 17 percent internal rate of return and a 1.5x multiple as of 31 March, according to a source familiar with the matter.

Meanwhile, Warburg Pincus, the fifth most successful fundraising firm in the world according to the latest PEI 300 listing, has hired Lazard to explore a secondaries transaction that would reportedly see the sale of up to $1 billion of Asian assets.

“The BC deal will be very helpful in opening the floodgates,” says Matt Jones, a managing director at Pantheon and co-head of its global private equity secondaries team.” GPs are slowly waking up to the fact that the secondaries market can help manage liquidity.”

BC Partners and Warburg Pincus are not the first well-known firms to have used the secondaries market to their advantage. In the past year, KKR made a transaction to manage its balance sheet, and ICG also recently successfully restructured a mezzanine fund. But they remain few and far between, with GP-led transactions historically associated with zombie funds.

One of the factors that has so far prevented the explosion of the GP-led market is LPs' views on the practice. The California Public Employees' Retirement System derailed the restructuring of a fund managed by First Reserve last year, citing inherent conflicts of interest. And earlier this year, Fenway Partners pulled an offer in which Prudential Capital Group proposed buying LPs' stakes in two funds because investors were unhappy with the pricing.

Andrew Sealey, managing partner and chief executive of Campbell Lutyens, the advisory firm working on the BC Partners transaction, points to the importance of meeting LPs' needs and not just satisfying GPs' interests.

“It only works if the deal creates more value,” he says. In early July, BC Partners' LPs were offered the opportunity to sell their stakes in BC IX at a 14 percent premium over net asset value.

“The market is moving to higher quality managers from more challenged managers,” Sealey adds. “This is a turning point.”

Primary GPs can take advantage of the secondaries market in many ways. In addition to tender offers or more complex fund restructurings, they can sell slices of portfolio companies to de-risk funds and return capital to their investors.

“The secondaries market has become a tool in the GP's tool kit,” says Carlo Pirzio-Biroli, a partner at Glendower Capital, which was until recently the in-house secondaries unit of Deutsche Bank.

Market participants remain confident that GP-led transactions will take off soon. If brands like Warburg Pincus and BC Partners are successful in accessing the market and easing the stigma associated with fund restructurings, that faith might finally be rewarded.