When I first began reporting on the secondaries market half a decade ago, the GP-led strategy was a fledgling corner of a $40 billion market. Fund restructurings were reserved for “zombie” managers and dedicated restructuring funds were a novel idea.
Poised for prominence
Fast forward to January this year and the GP-led market had become a staple. Household names such as Blackstone, Bain Capital and Warburg Pincus have run processes on their funds. Individuals at secondaries firms have quit their jobs to set up their own shops focusing on so-called “complex” GP-leds, while even GP-led buyside sceptics have been rumored to be mulling an about turn.
Indeed, veteran secondaries participants had so much faith in the GP-led sector that at least one of them predicted such processes would overtake LP sales as early as next year.
Dead in the water
How quickly things can change. Sources sister title Secondaries Investor spoke to in mid-March confirmed deals are paused and the market is essentially dead.
“Industry activity is virtually non-existent for the time being – everyone [has] slammed on the brakes,” says one New York-based buyer.
Even prior to covid-19, the GP-led market faced potential headwinds. Rollover co-investments, fund-to-fund transactions and long-hold funds have given private equity managers a wider range of alternatives to a secondaries process. A marquee deal blowing up could spook the market and make LPs wonder if GP-led restructurings are really such a good idea after all – something about which many secondaries firms that focus on GP-leds will no doubt have been worrying.
And concentration risk – particularly for single-asset deals – could force LPs to re-evaluate the role secondaries plays in their portfolios. Why pay a secondaries fund fee and carry for concentrated exposure to a single company when your buyout GPs offer co-investments on a no fee no carry basis? So the argument goes.
Over the past five years, proponents of GP-leds have all parroted the same catch-phrases: these deals give “optionality” to LPs; this is secondaries at its most creative; they allow GPs “extra runway” to maximize value in a portfolio company; and the most oft-used term of them all: GP-leds allow for “win-win-win” for the GP, its LPs and the incoming buyers.
It’s time to taste the pudding
Well, now is the time for the GP-led market to step up. A temporary pause on deals is inevitable while the entire financial industry waits for the dust to settle to get a clearer view on valuations. But if GP-leds really are the wonder drug they’ve been touted to be, now is the time to prove their worth.
Portfolio companies will need extra cash from their private equity owners to pay staff and prevent liquidations. GPs who, for whatever reason decide not to seek fund extensions, will require that extra runway now more than ever. LPs who want to cash out of a buyout fund because they need liquidity or because they don’t feel they’re aligned with their GP should have the chance to do so – at a reasonable, market-tested price – and it is the GP-led buyers that are best positioned to provide this service.
With PE-owned businesses around the world, especially those hit disproportionately by the covid-19 crisis, requiring capital to stay afloat, proving the concept of “win-win-win” is more important than ever.