The maturation of the secondaries market has led to a greater number of GPs proactively exploring their liquidity options. The growing number of experienced secondary market players has therefore resulted in more complex and niche transactions – particularly GP restructurings. According to Preqin’s survey of secondary market buyers in Q1 2018, 42% of secondary buyers expected their level of activity to increase in 2018. Since then, investor sentiment has improved in tandem with rising levels of dry powder in secondaries funds: total secondaries dry powder is up from $86bn in December 2017 to $88bn as at October 2018.
GP-led deals originating from funds that have exceeded their expected lifecycle typically occur when the remaining assets of a fund are rehoused into a new vehicle. These types of transactions are increasingly common and provide benefits for both LPs and GPs. For managers, fund restructurings can provide greater portfolio control and help fund managers maximize the value of the remaining assets in a fund while satisfying the needs of investors. LPs can benefit from increased liquidity and the ability to exit a fund with potentially underperforming assets, or if there is no longer a core manager relationship. However, GP restructuring transactions are highly time intensive and may affect the reputations of all parties involved, possibly also resulting in a price dilution should a GP require the secondary buyer to commit blind-pool capital to the new fund.
Preqin currently tracks 63 secondary buyers with a preference for GP restructurings; of these, 52% are based in Europe and 40% in the US. As seen in the chart above, over three-quarters (79%) of LPs surveyed completed GP restructuring transactions in 2017, and 63% said they were likely to increase their GP restructuring activity in 2018. This made fund restructuring transactions the most sought-after secondary transaction type, above direct secondaries, stapled secondaries and GP spin-outs.
Despite the potential risks, many fund managers have initiated fund restructurings: large corporations including Partners Group, Landmark Partners and Glendower Capital have recently backed fund restructuring deals, potentially increasing support for the market. Glendower Capital teamed with Strategic Partners Fund Solutions, Hamilton Lane and GCM Grosvenor Private Markets to lead a restructuring of six assets managed by Argonne Capital Group. The $78bn Partners Group recently backed the restructuring of Alantra Private Equity’s 2007 vintage buyout vehicle, N+1 Private Equity Fund II. The fund targeted mid-market companies in Spain and Portugal, and held a final close on $304mn. The remaining portfolio assets in the fund will be transferred into the new vehicle and managed by Alantra Private Equity’s team. King & Wood Mallesons provided legal advice to Alantra Private Equity.
As it stands, investor sentiment with regards to GP restructuring remains positive, and it is likely that the volume of GP restructuring transactions will continue to grow. Fund managers are becoming increasingly innovative, with many GPs executing larger and more complex transactions. The freedom offered by GP-led deals can be an attractive factor; however, this structure can potentially incur a conflict of interest with existing LPs. In some cases, investors are only given the option to exit the fund or rollover into the new vehicle – in this situation, LPs are unable to remain invested in the fund under the original terms offered by the GP. Many LPs are therefore still sceptical about this transaction type, yet the growing number of fund managers taking part in these deals shows that it is likely to draw in new LPs over the coming year.