There’s been much written about private equity sponsors “selling assets to themselves” over the past 12 months. This trend – which is hardly new – typically involves GPs moving an asset or assets out of an existing fund and into a separate fund, often named a ‘continuation vehicle’, as the sponsor continues on as manager.
Five years ago, such activity was worth around $16 billion a year, according to data from Lazard. Last year, this market hit a record $63 billion – a 294 percent increase in just half a decade. Deal figures for the first half of this year were just being released as this issue went to press, with a rough estimate of $27 billion trading – a slight drop on the previous half-year period.
Central to whether these deals work for all parties involved is the issue of alignment. Numerous moving parts and complex agendas can cause gridlock. With a growing number of fund managers turning to the secondaries market for the first time – and some, such as tech-focused investor Clearlake Capital, tapping this technology multiple times – ensuring alignment issues are ironed out is key.
In this special deep dive into alignment within secondaries, we take a look at the major hurdles that, if tackled correctly, could smooth the road ahead for first-time market participants – or, indeed, for secondaries advisers who have had their toes in the water for some time.
Maintaining alignment within the GP itself is an issue rife with possible tension. If third parties sense their fund manager is grappling with internal disagreements, it could be tricky to retain their trust throughout the investment process. Similarly, conflicts of interest within the LP base crop up easily, and can be difficult to stamp out – especially as limited partner advisory committees typically act in their own interests, rather than in those of other LPs in the fund.
Luckily, as the market grows, so too do the number of dealmaking options: managers can tap the debt markets to enhance alignment, one source tells Private Equity International. Alignment may be a tangled web, but routes to success certainly remain.