How helpful can secondaries tender-offer processes be to a fundraising?
That question has lingered since a handful of GPs, including some large ones, engaged in tender processes to offer liquidity to LPs in older funds, and to try and source fresh capital into new funds.
One such process is providing a strong example of the help tenders can provide.
Carlyle Group, which has been running a tender offer plus staple on its seventh fund, is nearing closure of the process that is expected to provide the firm with a shot of fresh capital in the range of $250 million to $300 million, three sources told Buyouts.
LGT Capital and Partners Group are lead investors on the deal, which gives LPs in Carlyle Fund VII the option to sell their stakes at a price around 80 percent of net asset value, sources said. Evercore is working as adviser on the deal.
The deal is not finalized. Spokespeople for Carlyle, LGT and Partners Group declined to comment.
In a tender plus staple process, a GP pre-selects a buyer or buyers at a set price, and then makes the offer to LPs in the older fund. LPs choose to sell or not. Tenders often include a “staple” component, that is, the new investors pledge to commit some amount of fresh capital to a new fund based on how much secondary sales they are able to achieve. Staples come in the form of a ratio, usually around $1 of primary capital for every $2 or $3 of secondaries sales.
The ratio on the Carlyle deal is not clear. Sources expect around 6 to 8 percent of the Fund VII LP base to sell. While this level of sales is considered low in a market that looks for at least 10 to 20 percent of the LP base to trade, the size of the Carlyle fund makes a difference.
Fund VII had around $21.5 billion of remaining fair value as of September 30, meaning that even at 6 percent of LP sales, the secondary would be around $1.3 billion. At a 2 to 1 ratio, the staple would be roughly $260 million – equivalent to a hefty commitment from a large institution.
That kind of primary would be a boost to Carlyle’s eighth flagship fund, which has been in the market since October 2021 targeting $22 billion. The fund raised at least $14 billion, according to the firm’s third quarter earnings report. Carlyle late last year asked LPs in the pool for more time to hit its target, a source told Buyouts, indicating that fundraising is going slower than expected. The source confirmed reporting last year by the Financial Times.
Fundraising has become much more of a challenge in the current environment. PEI data just released found that fundraising fell by nearly $100 billion last year, with a total of 1,520 funds raising $727.3 billion. Even with the decline, last year’s total was enough to come in as the third-highest fundraising year on record, PEI said.
LPs have grown stingy with their capital amid overweight exposure to the asset class after several years of rapid fundraising. They’re also facing dwindling exit activity, which is slowing distributions. As liquidity dries up, LPs are looking for ways to tap liquidity through secondaries, and are tightening their fund commitment schedules, sticking with only their most cherished relationships. And even then, the re-up process has become much more rigorous, sources have told Buyouts.
“A lot of funds thought they’d avoid 2022 and [raise] in 2023. They’re all heading for the entrance at the same time causing a traffic jam, it’s an odd phenomenon,” according to a consultant who works with LPs. “And then you have the compounding effect, LPs don’t have enough money to support either group: the ‘22s that rolled into ‘23 and the ‘23s just launching now. They’re all fighting for a smaller piece of the pie.”
In this environment, a process like a tender offer, which can simultaneously deliver liquidity to LPs who want it, and provide a boost to a fundraising, is viewed as a handy tool.
Tenders can be challenging, though, if the price isn’t right. While Carlyle’s price appears to be at a level that some LPs feel comfortable transacting at, other deals in the market have fizzled out because the price came in too low.
Pricing fell last year to an average of 81 percent of net asset value across all strategies, according to Jefferies’ full-year 2022 secondaries volume report. Pricing for buyout funds, which traditionally captured the highest pricing, fell to 87 percent of NAV last year. “Demand for buyout funds remained robust (72 percent of total volume), as buyers preferred mature assets with stable cash flows,” Jefferies said in its report.
If Carlyle’s deal closes with such a hefty staple, it could be a sign to other GPs that the secondaries market is a way to move things along. Another deal that closed recently was run by Harvest Partners, which tendered its seventh and eighth funds with a staple ratio of 2 to 1, Buyouts previously reported. Harvest achieved a range of 15 to 20 percent of the LP bases selling, though the sales differed across the two funds, with more investors in the older fund choosing to transact, sources said.