Secondaries special: Opening the restructuring floodgates

Andrew Sealey 180
 Andrew Sealey

Secondaries buyers and advisors have been betting for several years that the market for GP-led transactions is about to explode.

However, they have struggled to make these types of deals attractive enough to limited partners.

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According to data produced by UBS, the percentage of total secondaries transaction volume accounted for by GP-led transactions 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, a $1 billion tender offer deal on BC European Capital IX, in which Lexington Partners bought 22 LPs’ stakes and made a staple commitment to BC European Capital X, could jump-start the GP-led transaction market.

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

BC is not the first well-known firm to have used the secondaries market to its 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, as historically, GP-led transactions have been attached to 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’s 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, which has spun out of DB Private Equity.

Market participants remain confident that GP-led transactions will take off soon. But for that to finally happen, fund managers will need to improve their awareness of LPs’ needs during negotiations.