GP-led liquidity processes rise as some LPs push back

Secondaries have gone mainstream.

That’s the sentiment from the market as investment activity numbers have come in for 2016. Most surveys show total volume fell last year from prior years, but GP-led processes, including restructurings and tender offers, are on the rise.

This is a heartening signal for the market that such processes, which still have a negative perception among some LPs, are being more widely accepted.

“It’s a nascent, small market that’s growing and working its kinks out,” said a buyer in the secondary market.

Intermediary Greenhill Cogent said GP-led transaction volume hit $9 billion last year, almost 25 percent of the market. Setter Capital pegged total private equity direct secondaries at $9.2 billion; total direct secondaries were $10.1 billion last year, down about 1.4 percent from 2015.

And Evercore found that direct secondaries and GP liquidity solutions represented about 29 percent of total 2016 deal volume, up from 22 percent in 2015.

Total volume numbers varied: Greenhill Cogent pegged total PE secondary volume at about $37 billion, down about 10 percent from 2015. Evercore also put total volume at $37 billion, down from $42 billion

Setter said total secondaries volume hit $42.15 billion across various strategies, including private equity and real estate. That was down from total volume of $49.6 billion the prior year. PE secondaries decreased 7.7 percent to $34.8 billion, Setter said.

But while the numbers for GP-led deals rose, the structures of those deals varied. Cogent said fewer large restructurings were done in 2016 than in prior years.

“Instead, there was a larger number of GPs proactively offering investors liquidity options that did not involve substantial changes to the current fund,” Cogent said. “Specifically, we saw an increase in GP-led tender offers, which in some cases required a stapled primary capital commitment from buyers and/or a multiyear extension of a fund.”

Over the past year, several large restructuring processes fell apart or failed to attract as much LP interest as anticipated.

This includes First Reserve, which tried to restructure its 11th fund. The firm lined up Pantheon and Intermediate Capital Group as lead investors on the process, but the firms decided to back off the transaction after the deal generated only about $88 million of existing LP sales. The two firms had a minimum target of $175 million and a maximum of $400 million of LP sales.

Late last year, JLL Partners broached the idea of a liquidity process for its 2005 fifth fund with LPs, but the two sides eventually agreed on an 18-month fund extension.

“LPs are getting used to this,” the secondary buyer said. “I think the [LPs] that are most proactive and actually dictate the transactions to fit what they want to do and gather LPs together to accomplish a goal may actually be the success stories for sellers.”

Action Item: Check out Setter’s volume report here: http://bit.ly/2jZI8Xk

A man carries a sculpture at a yard sale in Lewiston, Niagara County, New York, on Aug. 31, 2013. Photo courtesy Reuters/Zoran Milich