Hellman & Friedman is working through a large process to move three assets out of an older fund that has attracted several of the biggest secondaries buyers in the market, three sources told Buyouts.
The process is among several large GP-led deals that have hit what has become a busy secondaries market as sponsors try to finish deals before year-end. Other GPs with deals in market include Summit Partners, Audax Capital Group and Thomas H. Lee Partners.
Goldman Sachs, Blackstone’s Strategic Partners, HarbourVest Partners and Lexington Partners are among the large secondaries buyers participating in Hellman & Friedman’s deal, sources said.
The deal also includes a cross-fund element, with participation from Hellman & Friedman’s ninth fund. All told, the total value of the process, including existing LPs rolling their stakes into the deal rather than selling, could be more than $10 billion. Around $2 billion of that represents the external secondaries buyer capital, the sources said.
The deal is in its advanced stages and is expected to close by the end of the year, one of the sources said. It would allow LPs in Fund VII the option to cash out of their interests in the assets, or roll their stakes in a continuation pool that will be created to hold the three companies. The price at which Fund VII LPs can cash out of their interests in the assets is not clear.
Hellman & Friedman closed Fund VII on $8.8 billion in 2009. The fund was generating a 23 percent internal rate of return and a 2.7x multiple as of March 30, 2020, according to performance information from the California Public Employees’ Retirement System. Hellman closed Fund IX on $16 billion in 2018.
The cross-fund component of the transaction is unusual. GPs using newer funds to participate in secondaries processes for older funds is relatively rare and comes with some controversy. While secondaries investors generally like to see GPs participate in their own secondaries deals, cross-fund transactions can be a tougher sale to limited partners in older funds. LP concerns focus on the potential for pricing conflict – the newer fund wants to buy at the cheapest price possible, while LPs in the older funds want to sell for as much as possible.
“If the GP is putting money from the newest fund … it sends the following signal: ‘We’re expecting this to generate an attractive enough return that we’re putting the new fund in it,’” a secondaries market professional previously told Buyouts.
But existing LPs could have concerns, as has been the case with cross-fund deals in the past. “If you think it’s the right time to sell these, then go sell them,” said another secondaries professional.
Hellman & Friedman used a similar strategy in a past deal. In 2018 the firm ran a single-asset secondary on its tech-company Kronos Inc. In that deal, investors, including Hellman’s Fund VIII and Blackstone Group, lined up to buy out LP stakes in the company, which was held in Hellman’s sixth fund. The Kronos deal required approval from the limited partner committees of both Hellman funds, and included two fairness opinions.
Another interesting aspect of Hellman’s current secondaries deal is the participation of Lexington. The firm, one of the largest secondaries buyers, has generally stuck to more traditional limited partner sales of interests in funds. A Lexington spokesman did not return a comment request Wednesday.
Overall, the first-half saw a significant slowdown from the same period last year for secondaries activity. Total deal volume came in around $18 billion in the first half, a drop of 57 percent from the $42 billion tallied during the same period last year, according to Greenhill Cogent’s first-half volume report.
However, things are looking up as deals are coming online. GPs are more interested than ever in finding ways to extend holds over certain assets as exit timelines are pushed out because of the market havoc from the pandemic. The second half is expected to potentially be busier than prior years, Buyouts reported recently in our in-depth look at the secondaries market.
Spokespeople for Goldman Sachs and HarbourVest declined to comment. A Blackstone spokesperson did not respond to a comment request.