Side Letter: PE’s LP-GP disconnect; Gombault’s generational opportunity; SEC’s insider trading exams

LPs and GPs don't have a full grasp of what makes the other party tick. Plus: why secondaries is facing a once-in-a-lifetime buying opportunity and European deal statistics for the first quarter. Here’s today's brief, for our valued subscribers only.

Just happened

GPs and LPs: overestimating what makes the other tick (Source: Getty)

In two minds
Private equity’s challenging fundraising environment has dominated headlines over the past 18 months. Fresh research suggests that managers are less concerned about the situation than their investors believe. The inaugural Investment Funds Outlook Report from US law firm Barnes & Thornburg found that out of a list of 10 issues, most LPs (58 percent) identified fundraising as the most pressing issue for GPs. When asked the same question, GPs ranked fundraising as their fifth most pressing issue, at 24 percent.

The apparent gulf in perception is noteworthy given that fundraising seems top of mind across the board these days. Instead, GPs identified returns and valuations as their top concerns at 40 percent and 39 percent, respectively. Though LPs also identified these issues as second and third-most pressing for managers, regulatory risk – which GPs said was the third-most important issue of the day – didn’t even make it into LPs’ top five.

Conversely, GPs also had a skewed idea of what LPs are worried about. Managers rightly identified returns as the top concern for investors, yet greatly overestimated how much LPs are thinking about valuations and the ability to create stable private credit portfolios, and massively underestimated how big of an issue staffing is for LPs. At a time when many LPs are having to make difficult decisions about their GP roster, the ability to demonstrate an understanding of what is making their investors tick may well give sponsors that important edge.

Here are some other notable findings from the research, which surveyed 125 GPs, LPs and service providers:

  • More than a third (35 percent) have seen more investment period extensions over the past 12 months, and 90 percent expect an increase over the next year.
  • Only 23 percent saw fundraising extensions over the past year, yet 80 percent expect an increase over the coming year.
  • Though just 17 percent saw changes in GP commitments last year, 75 percent expect GPs to have to stump up more.
  • About a third (34 percent) of LPs expect to decrease the number of GPs they commit to over the next year. Likewise, 29 percent of GPs expect a decline in the number of LPs in their funds.
  • Though two-thirds of LPs view succession planning as an important consideration when evaluating GPs, only 41 percent of the latter camp have a plan in place; one third are implementing plans.

Talkin’ bout the generational buying opportunity
There’s a once-in-a-generation buying opportunity around the corner in the secondaries market, according to Ardian’s former fund of funds head. Writing in his latest quarterly newsletter, seen by Side Letter, Vincent Gombault argues that a wave of deals will flood the market as early as later this year, with secondhand stakes in private market funds likely to provide the most attractive opportunities. “From my experience, the current period is one of the most challenging in the past decade and I expect it to take at least 12-18 months to readjust,” Gombault wrote. In his view, GPs holding onto assets for longer due to a dearth of exit routes, coupled with the higher cost of debt, means funds of vintage 2019-21 will see significant impacts on their IRRs. Secondaries buyers who acquired portfolios of funds at par or a premium to net asset value over the past three years will find out they’ve paid expensive prices, he added.

Whether and when this wall of secondaries deals will indeed hit the market is tricky to say. What we do know is that in conversations with secondaries market sources, the consensus is that it’s not exactly a deal bonanza right now. One lawyer who works on secondaries deals told Side Letter last week he’s been rushed off his feet with countless meetings. “You know the market’s quiet when everyone wants to meet – it means they’re not actually doing deals,” the lawyer said.


Insider trading
US Securities and Exchange Commission examiners looking to prevent the misuse of material non-public information are particularly interested in firms’ use of expert networks and alternative data, our colleagues at Private Funds CFO report (registration required). In recent exams, PE managers said SEC staff have scrutinised firms’ policies and procedures, as well as the internal controls in place to ensure that MNPI is not used for insider trading. The SEC has also asked PE firms to provide a list of all research providers, including expert networks and logs of discussions with these providers.

Sources told PFCFO that the SEC wants assurances that firms understand the potential risks associated with insider trading and are taking the necessary steps to prevent it and the misuse of MNPI. Dan Campbell, a director at ACA Group, noted that he has also seen heightened interest from the SEC staff on the risks associated with MNPI within the private markets. “The SEC staff has observed an increasing use of alternative data, expert networks, and more instances where there’s interaction with public companies, so the SEC staff wants to see that managers have identified potential issues and risks and that they have instituted appropriate controls and procedures to prevent the misuse of MNPI by internal and external stakeholders.”

An update from Europe
For all the doom and gloom in European news these days, dealmaking appears to be in reasonably good shape. Q1 2023 saw 279 buyout deals across Europe’s TMT, industrials, healthcare, consumer, leisure and retail and business and tech-enabled services sectors, according to DC Advisory’s Q1 EU Private Equity Mid-Market Monitor on Thursday. That beats Q1 totals for 2022 (214) and 2021 (261). Here are some other takeaways:

  • France accounted for the largest proportion of deal value at 40.4 percent, while Central and eastern Europe was the least active, at 2.1 percent.
  • Industrials were the most popular sector for buyouts, accounting for about 33 percent deal volume; healthcare took the smallest share at just 6.64 percent.
  • Dry powder remained broadly flat at €244 billion, compared with €242 billion at the end of 2022.
  • GPs that opt to start sales processes will be those that either have a strong need to exit an asset due to fund dynamics, or those that own assets that are well poised to generate strong buyer interest.
  • Sponsors are unlikely to risk being tainted by failed auctions for underperforming businesses, likely opting instead to hold off launching some sale processes until September or even next January.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

22 May

23 May

24 May

25 May

26 May

Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza and Katrina Lau.