Amid festive markets, the hunt for liquidity goes on

Reading the front page of the Wall Street Journal this week, and talking to sources, it truly feels like the festive season is here.

Optimism prevails! The Fed is talking about cutting rates next year and markets soared on the news. Dealmakers who have been waiting out the market to see if financing costs come down are licking their chops for what some believe will be a busy first quarter.

If this sort of euphoria lasts, it could lead to a natural rebalancing of LP portfolios, as public holdings rise in value, realigning private equity exposure back into line with policy. And if deal markets open up that likely means exit activity will increase as well, pushing distributions back into the hands of LPs eager for their PE taps to start flowing again.

Liquidity, liquidity, liquidity – it’s the word on everyone’s lips right now. GPs are desperate to show their LPs they know how to deliver the goods. And if they can’t do it through traditional exits, they’ll seek other methods.

A potential deal announced this week was an example of an interesting way a GP could try and return proceeds to LPs in older funds, without going through the stress, time and cost of running a continuation fund deal.

Veritas Capital is reportedly in talks to sell a stake in healthcare analytics company Cotiviti to KKR. But there’s a twist, according to the Financial Times. Veritas is considering selling 100 percent of its stake in the business held in two older funds, and then using capital from its newest fund to reinvest into the company for a 50 percent stake.

The sale would allow Veritas to return proceeds to LPs in the older funds, a big move for the firm as it works to raise its ninth fund, likely targeting more than $12 billion, Buyouts previously reported. The deal would give the firm’s newer Fund VIII exposure to Cotiviti.

Likely, Veritas would have to get permission for the deal from the LPACs of the various funds involved. These types of cross-fund deals require LPACs to waive conflicts because the GP is on both sides of the deal as a buyer and a seller. I put in a question to the firm about the mechanics of the deal and will update if/when someone gets back (not holding my breath).

LPs generally aren’t fans of cross-fund deals, though they also aren’t huge fans of continuation funds either. Generally, LPs would prefer to see their managers hold a company and find a traditional exit, rather than find “creative” ways to deliver distributions.

Though some sources have pointed out that in the slower deal environment, with financing costs more expensive, firms that need to deploy capital might have great targets right at home in their own portfolios. These are companies they’ve nurtured and grown, with business plans they’ve helped craft and that are ready for their next phase of growth. What better way to deploy capital than into something you already know well, with a growth path you’ve crafted?

We’ll be seeing more of this kind of thing as the industry strives to get liquidity flowing. Amid all the creativity, a natural pivot in the markets could be the only cure the industry needs to get back on track.

What do you think? Hit me up at christopher.w@pei.group or find me on LinkedIn.