AE Industrial explores process to allow LPs to cash out of older funds

Tenders on paper seem to solve two issues at once – LPs in need of liquidity and quick fundraising momentum, yet LPs have proven reluctant to actually sell in recent tender offerings.

AE Industrial Partners, in market with its third flagship fund, is considering offering investors in its older funds the chance to cash out in a process that would also include a shot of fresh capital into the new pool, sources told Buyouts.

AE is the latest in a string of GPs running secondaries tender-offer-plus-staple processes that serve as a way to deliver liquidity back to LPs in older funds, and give a boost to new fundraising.

The processes on paper seem to solve two issues at once – LPs in need of cash flow from the PE programs as exit activity slows, and quick fundraising momentum at a time when LPs have slowed their commitment pace.

Yet, LPs have proven reluctant to actually sell in recent tender processes, including those run by Carlyle Group and one envisioned by Welsh Carson Anderson & Stowe that never actually went live. Pricing remains the biggest challenge to actually getting deals done.

“They don’t work with any number starting with eight, they have to start with a nine,” quipped a secondaries adviser, talking about pricing that needs to be at least 90 percent of net asset value for an LP to actually sell.

In a tender plus staple, the GP holds an auction to find a buyer at a set price to buy fund stakes from LPs in an older fund or funds. The buyer or buyers will also generally pledge to kick in a shot of fresh capital to the GPs’ new fund at a ratio of $1 for every $2 or $3 of secondaries sales.

The firm is working with Jefferies on the process, sources said. It’s not clear when or if the tender process will ultimately go live on the market. The process would give LPs in the firm’s first and possibly second fund the option to cash out.

AE would also be looking for a staple of fresh capital into Fund III, which has been in market since at least last year, according to a Form D fundraising document. The document for Fund III, filed in April 2022, shows a target of $1.75 billion, though with no indication of how much the fund has raised so far.

AE Industrial, operating since 2014, closed its debut fund on $680 million in 2016. It closed Fund II on $1.36 billion in 2018.

The firm, controlled by founding partners Michael Greene and David Rowe, targets investments in aerospace, defense and government services, space, power and utility services and specialty industrial markets.

AE also runs a venture partnership, an aerospace opportunity fund, a structured capital pool and a continuation fund to hold Fund I assets, according to its Form ADV. AE managed about $5 billion as of December 31, 2021, according to the Form ADV.

Last year, average pricing for LP sales was 81 percent of net asset value, an 1,100 basis point decline from 2021, according to Jefferies full-year secondaries volume report. “Most LPs are not going to proactively take liquidity unless it’s compelling,” said an adviser with no connection to the transaction.

LP tenders represented only about 7 percent of the $111 billion of total market volume last year, according to Greenhill & Co’s 2022 volume report.

Industry activity

Several tender offer deals in the market have received what market participants consider only moderate LP selling uptake. Carlyle Group has been running a large process allowing LPs in its seventh fund to sell out and would include a pledge of primary capital into Fund VIII from buyers. While that deal has not closed, preliminary estimates put selling uptake at around 2 percent of the LP base, sources said. A Carlyle spokesperson declined to comment.

Harvest Partners ran a tender offer plus staple process that received moderate sales – somewhere around 15 to 20 percent of the combined LP base across two older funds, Buyouts previously reported.

Meanwhile, across the industry, some tender offer deals have seen 30 percent selling uptake, the adviser said. Secondaries market investors expect GPs to continue trying to use tender offers this year as fundraising remains challenging.

“We’ll continue to see tenders. The reason is, it is a tough fundraising market. GPs are saying, ‘let’s go clean up the LP base and try and get something for it.’ Those of us on the buy side have better uses for our capital right now,” said a secondaries buyer, describing a plethora of quality continuation fund deals and LP portfolios for sale.

“It used to be these tenders had to happen around par [to net asset value]; now we’re talking about tenders around 80 [cents on the dollar]. It’s sort of a different conversation,” the buyer said.