A recent secondary deal run by Harvest Partners garnered what some market participants see as a sluggish level of limited partner sales, throwing into question whether LPs are ready to sell their stakes for ready cash.
Tender offers have been viewed as one of the few types of secondaries deals with the prospect of actually transacting in the market dislocation. While pricing discrepancies continue to depress secondaries activity around continuation fund transactions and LP portfolio sales, tender offers have been seen as a viable option both for GPs looking to boost fundraising and for LPs eager for liquidity.
The challenge with tender offers always is whether LPs will sell. In a tender, GPs select a buyer and set a price and then give LPs in an older fund the option to sell or not. Such deals often include a staple component, or a shot of fresh capital from the buyer into a new fund. The staple is usually offered at a ratio of LP sales to fresh capital, or for every $3 of LP sales the new investors will kick in $1 of primary capital.
The Harvest process allowed LPs in the firm’s seventh and eighth funds to sell their stakes at relatively high prices compared to other recent deals pricing around 80 cents on the dollar. The Harvest deal included a staple of fresh capital at a 2 to 1 ratio.
Harvest achieved a range of between 15 to 20 percent of LPs selling across two older funds, sources said. Some pegged the selling as low as under 10 percent LP sales, but sources stressed sales differed in the two funds. A Harvest spokesperson declined to comment. Evercore worked as secondaries adviser on the process.
While the lead buyer in the deal got what they wanted, investors who came in later may not have gotten sales at the level that made the deal attractive, two of the sources said.
Indeed, one potential investor in the deal, HarbourVest Partners, dropped out of the process for undisclosed reasons, Buyouts previously reported.
The lead buyer for both Harvest funds was Ardian, sources said. Other investors on Fund VII were said to have included StepStone Group and Blackstone’s Strategic Partners. On Fund VIII, StepStone was said to be involved along with Ardian.
A rate of 20 percent of the LP base of a fund choosing to sell was considered fairly average prior to last year’s market dislocation, sources told Buyouts. LPs’ desire for liquidity as exits slowed in the latter half of 2022 heightened expectations that tender offer sales could exceed 30 percent. However, sources pointed out that sales enthusiasm varies depending on the deal.
More LPs chose to sell in Harvest’s older fund, and fewer LPs took up the offer in the newer fund, which was not a surprise, one of the sources said. Harvest closed its seventh fund on more than $2.2 billion in 2016, and its eighth fund on more than $4.1 billion in the 2019-20 time frame.
The high prices on offer were achieved with some incentives, as has been the case with deals over the past six months or so.
LPs in Fund VII were able to cash out of their stakes in cash at either 91.5 percent of NAV as of the first quarter, or 95 percent of NAV as of the same date in a deferral option, which would pay 50 percent at close and 50 percent in 12 months, sources said.
For Fund VIII, LPs could cash out at around 91 percent of NAV as of the first quarter, or 95 percent of NAV in a deferral, with 25 percent payment at close and 75 percent in 12 months, sources said.
With the Harvest process finished, another large deal being watched by market observers is from Carlyle Group. Carlyle is letting LPs in its seventh fund cash out of their stakes in the pool in a deal that would also include a staple into its next flagship fund, which has been in the market, Buyouts previously reported.