GP-led secondaries worsen LPs’ workload concerns

Limited partners don’t always feel as if they have enough time or resources to evaluate GP-led secondary processes, and in general they feel that private equity is taking up more of their bandwidth, a survey by Coller Capital shows.

GP-led secondaries are an increasingly mainstream part of the PE market, with two-thirds of North American LPs and three-quarters of European LPs reporting that they have experienced one or more GP-led secondaries processes in their portfolios.

Almost half of LPs expect time pressures and resource constraints to cause headaches in future GP-led secondary transactions, according to Coller Capital’s Summer 2019 Private Equity Barometer.

GPs are beginning to explore potential secondary transactions earlier on with their existing investors, in part out of respect of concerns over time constraints, according to Eric Foran, a partner with Coller Capital. While a GP may believe that 20 business days is an appropriate amount of time for an investor to receive notification and review a fund restructuring, that can cause difficulty for bandwidth-constrained LPs.

“An LP needs to digest a lot of information, and then potentially re-underwrite a new investment if there is a rollover or a reinvest option,” Foran said. “If they’re learning about the transaction for the first time at the start of the 20-day period, then that is a lot of work to process.”

GP-led secondaries are just one of the factors pressuring LPs in an evolving and ever-more-liquid asset class, according to Jeremy Coller, the firm’s CIO.

“The rigidity that characterized the early days of LP-GP relationships is disappearing rapidly,” Coller said in a statement. “Investors are deepening their partnerships with individual managers and becoming far more proactive in managing their portfolios. The downside for limited partners themselves is that their workloads are also getting heavier, almost across the board.”

Two-thirds of LP respondents said their workloads had increased in the past five years, with North American investors especially feeling the pinch. Some factors cited in the increasing workload include co-investment, portfolio management, regulatory compliance, due diligence before an investment and researching and building GP relationships.

GP minority stake sales are another sign of a market that is evolving to be less rigid. LPs are sometimes wary of such transactions, depending on the reason for the sale. Two-thirds of LPs say facilitating generational change and expanding the manager’s resources are appropriate reasons for a minority stake stale. Only about a third of respondents said GPs should sell minority stakes to fund GP commitments or launch new strategies or products, according to Coller Capital.

While LPs don’t want GPs to use cash from minority stake sales to branch out, they are increasingly comfortable with the general idea of brand-name partners launching new strategies.

Half of investors in Europe and North America, and nearly four-fifths of Asian investors, said they would invest in a new strategy with a core manager, a significant increase from five years ago, according to Coller.

Of the investors that have backed new products offered by their existing GPs, 79 percent said returns met expectations, 8 percent said returns did not meet expectations, while 13 percent said returns exceeded expectations.

Despite the concerns about increasing workload, LPs aren’t backing away from private equity. More than half of LPs expect to commit more than 20 percent of their assets to alternative investments in 10 years, and 43 percent expect to have more than 10 percent of their assets committed to PE, up from 34 percent today.

Action Item: Read the full survey from Coller Capital: https://bit.ly/2W8LuqF