This story first appeared in sister publication Private Fund CFOs’ October issue. Read Part I here.
How much is my firm worth?
“If you are only selling 10-15 percent of the economics and some of that might be going back into the firm, then valuation is not the most important piece of the puzzle,” says Saul Goodman, head of the alternative asset management practice at investment bank Evercore. “This market focuses on long-term cashflow and franchise value; not just putting a multiple on current earnings,” he notes, adding that the management company and carry vehicles are valued differently.
Goodman stresses that these private markets investors do not look to the publicly listed firms for comparables. “The private market is separate and people are looking at a much longer time horizon – not just the next year or two.”
Most advisors are, understandably, reluctant to outline any sort of “back-of-the-napkin” approach to valuing a PE firm. For one thing, they don’t want to publicise commercially sensitive information. “No, no, no,” chides one banker when asked if there is a ready way a CFO can put a valuation on their own firm. “They are valued on a DCF basis – very complicated models – but I don’t want to get into it for competitive reasons. Given the long-life nature of these investments – not just one fund, but multiple fund cycles – these tend to be long-dated models.”
Another advisory source breaks it down more willingly: “Assuming a typical two-and-20 structure, we would advise that the firm is worth around 10 percent of its AUM, and maybe you would look to sell 5 to 10 percent of the firm.”
“It is a small set of financial and legal advisors who know the deal pricing, deal structures, terms, fit and preferences of the buyers,” says Ted Gooden, head of private markets advisory practice at Berkshire Global Advisers, “so you need to go to someone with multiple reference points of competed deals.” Gooden has advised on a number of GP interest transactions, including Clearlake Capital and Siris Capital.
Am I big enough?
There is no litmus test in terms of AUM or maturity to tell whether a transaction like this will work for you, says Goodman. “Obviously it works better the bigger you are, the longer you have been in business and the more profitable, but it’s not like there is a checklist covering certain metrics which have to cross a certain threshold.”
One restriction on whether your firm will be a suitable target is the size of check that investors are looking to cut. Advisors say that the largest investors in the market will want to deploy circa $150 million to $200 million at a minimum.
Wafra, however, invests across the entire GP lifecycle: “We’ll be the first dollar in, catalyse growth or partner with mature managers,” says Adamson. The majority of its GP investments have been in younger firms. What Wafra is looking for is “defensible franchises in asset classes and strategies that have enduring value for asset owners around the world,” adds Adamson. In other words, if you have proven your ability to invest well in a segment that is in favour with global investors (with which Wafra boasts intimate knowledge), you may be of interest regardless of size.
Where do I start?
Perhaps unsurprisingly, advisors extol the virtues of getting seasoned advisors – both legal and financial – on board. “There are very few people who have actually done these, and you don’t want someone learning by doing on your deal,” says one banker.
There is some structuring work to be done to ready a GP for external investment. “It is a great way of institutionalising a firm,” says Kirkland’s Lavon-Krein, “because you need to create a neat top holding company. It is basically almost like preparing for an IPO. From a legal perspective, you need to go through a restructuring; any lax documentation needs to be cleaned up. You need to put policies in place and you cannot have any informality about your processes. There is starting to be a well-trodden path in terms of what this looks like.”
With the legal house in order, there is also the economic house to get into shape. A process such as this prompts conversations about key persons and economics sharing within the team, which can either be cleansing or awkward.
Peter Martensen, a partner with advisory firm Eaton Partners, says he has advised on four strategic GP transactions in his career. “It triggers a conversation about the long-term plans: who will be in charge when the boss gets hit by a bus? A lot of times it is cathartic; sometimes it is not. These are conversations that should have happened already but never did.”
There needs to be a clear rationale for the transaction in terms of what the GP will be doing with the proceeds and what they are looking for from a partner. Wafra, for example, will avoid GPs who are “purely looking for a financial transaction”, says Adamson.
These deals are, ironically, about more than just capital. When BC Partners announced its transaction with Blackstone this summer, partner and chairman Raymond Svider said, “We look forward to leveraging Blackstone’s best-in-class resources and exceptional talent.” Those resources were not specifically identified, but likely refer to portfolio company cost savings, back office perks, new platform advice and introductions. GPs considering a deal should know what they want to achieve and what capital and resources they need to do it.
Where to now?
These deals are sensitive subjects. None of the GPs contacted for this article were willing to discuss their own transactions. Speculating on why this might be the case, most contacts attribute it to the optics of what their LPs might be thinking. “It is not as commonly accepted as it should be,” says one banker.
Looking at the roster of names that have undertaken these transactions – and their subsequent fundraising success – there is certainly no evidence to suggest investors are being put off.
The trend is broadening and deepening, says Goodman, with more interest being shown in credit managers, real estate managers, infrastructure funds, mid-market firms, VC firms, as well as a large increase in activity in Europe: “It is becoming commonplace and viewed more as a financing than a transformational event.”
Berkshire’s Gooden is equally positive. “This is a positive and exciting discussion to go through. If you know what you are doing and have the right advisory, you get a chance to look at your firm and scrutinise your strategy, succession planning and long-term capital needs.”