The restructuring of ageing private equity funds – those funds that are in their 10th or 12th or even 14th year, still holding assets that have not yet been exited – is potentially the biggest opportunity in the secondary market currently.
There are hundreds of funds that are in this situation (or will be in the next few years) – including some where the manager will not be raising new funds, creating issues of misalignment between LPs and GPs. However, out of that universe of ageing funds, perhaps only a few dozen will actually go through a restructuring process, according to a group of secondary professionals who sat down with Private Equity International in New York in April to discuss the state of the market.
THE $100BN PROBLEM
There was a clear consensus that this kind of restructuring can have substantial upsides for firms willing and able to work through such deals. It’s not at all clear, however, just how easy it will be to get these transactions done. Rife with conflicts of interest and potentially antagonistic partners, many of these potential deals could turn out to be more of a headache than a boon, according to several of our roundtable participants.
“In our view, there are several dozen very interesting fund recapitalisations – and hundreds and hundreds of other funds that will be asked to do the best they can to wrap up those partnerships,” says David Wachter, founding partner of W Capital Partners, which has been working out liquidity solutions for LPs and GPs in mature funds since 2001.
There are several dozen very interesting fund recapitalisations — and hundreds and hundreds of other funds that will be asked to do the best they can to wrap up those partnerships.
“Those couple dozen are very interesting to everybody, because they’re the ones with portfolios of multiple interesting assets – and there’s just a sequence of time or company-by-company variables that have basically put a good GP in a position where they’re just not liquid. Those will get re-capped by very large secondary funds, and other funds that have less size, diversification or portfolio attributes that are attractive to the large secondary buyers … they just have to work their way out of those assets,” he says. “It’s going to be a huge business for the lawyers.”
Estimates of exactly how much net asset value resides in funds that are 10 years or older vary, but typically range from $75 billion to $100 billion. More and more firms are having a hard time finding exits for their investments; on average, hold periods have extended to about eight years, having previously averaged about four years, Wachter says. This is partly because of an increasing glut of product on the market. Six years ago, there were about 2,200 private equity-backed companies; today, there are about 6,000, according to Wachter.
As more portfolios age – including those buyout funds from the credit bubble era, from 2005 through 2007, when many investments may have been overvalued – those funds will have to be closed one way or another.