Partner at Travers Smith, set to join Simpson Thacher & Bartlett
Managing director at Campbell Lutyens
Principal, secondaries, at CPP Investments
Is there anything about secondaries, particularly the GP-led market, that you would like people to better understand?
Ed Ford: That, despite the significant take-up to date, the market is nascent and a large majority of GPs have yet to explore a GP-led secondary. There is a lot of growth to come!
Stephen Henderson: The breadth and flexibility of solutions the secondary market provides. There are a wide variety of transaction types that fall under the ‘GP-led’ umbrella, such as continuation funds, tender offers, strip sales and fund-level financings, with each designed to help solve for a particular set of objectives. Secondaries market participants are innovative and willing to be creative on structure in order to best serve the interests of all stakeholders.
Carlin Shen: The market has experienced tremendous growth over the last few years, but demand for secondaries capital has outpaced supply, resulting in near-term undercapitalisation. Flexibility and open-mindedness have become increasingly important for GPs in GP-led secondaries to ensure transaction certainty, such as bringing in a third-party minority investor or contributing additional capital from their latest flagship fund, which also helps increase alignment.
What are the most interesting and challenging aspects of working on a GP-led secondaries transaction?
EF: The amount of innovation going on is fantastic – there’s a real sense that the market is developing each year and that secondaries capital providers are now able to provide capital across the capital structure (debt, preferred equity, structured equity and equity) for transactions in all major asset classes. This means that GP-leds are often multi-disciplinary from a legal perspective, which creates great opportunities to work with plenty of different people and teams.
CS: Almost every aspect of a GP-led deal is negotiable and customisable, which allows buyers to get creative in coming up with the desired transaction structure, portfolio composition, alignment construct, economic terms, etc, in addition to the actual purchase price. The challenge is figuring out which factors to prioritise based on each unique transaction dynamic and what trade-offs you are willing to make.
What does a ‘good’ GP-led deal look like today?
EF: There is a clearly articulated and compelling narrative as to why the GP-led process is being undertaken and why it’s in the best interests of the LPs (and perhaps the asset) to exit in this way. In a continuation fund structure, this typically means clarity as to why the continuation fund is the best buyer for the asset versus a third party. Everything else flows from that.
SH: It needs a clear rationale that resonates with existing LPs, secondaries investors and the GP. For concentrated transactions, the focus remains on quality assets that show resiliency, have a proven track record, and where existing investors can realise strong returns, while more diversified transactions will meet potential objectives like delivering early optional liquidity for existing LPs or securing additional runway for GPs to maximise value.
CS: A good GP-led deal creates a win-win-win outcome for the LPs, the GP and the secondaries investors, and is articulated by a clear transaction rationale. While existing LPs are seeking strong crystallised returns, buyers are looking for high-quality assets and strong GP alignment with a differentiated risk/return profile resulting from the GP’s continued ownership and involvement, particularly today, given the uncertain macro environment.
What are your expectations for the market over the year ahead?
EF: The pools of capital that are counted as ‘buy-side secondaries capital’ have expanded significantly in recent years and will become increasingly elastic. This now includes secondaries funds, NAV lenders, co-investment strategies, sovereign wealth funds, large pension funds, new ‘syndicate participants’ (often pension funds, insurers, etc), GPs’ dedicated re-investment funds, and GPs’ successor funds when they acquire assets in fund-to-fund transfers. This trend will continue and there will be increasing overlap between ‘primary capital’ and ‘secondary capital’.
SH: While the GP-led market is still somewhat capital-constrained, we expect to see an increase in GP-led activity in 2023 compared with last year, driven by several factors, including increasing LP demand for liquidity, GP demand for longer holds, and firmer pricing supported by greater stability in the public markets.
CS: Although LP/GP transaction bid-ask spreads have widened over the last year, LPs’ liquidity needs are now becoming more pressing, while GPs have become more motivated to return capital back to LPs that can be recycled into primary commitments. This will continue to drive dealflow, with buyers who can be flexible and creative with transaction structures best positioned to bridge the gap in pricing expectations.