This article is sponsored by LGT Capital Partners
Describe the supply/demand imbalance for GP-led transactions. What is driving that?
Andrew DiGeronimo: In the US, we saw nearly $10 billion of GP-led dealflow in Q1 2022, and deal size continues to increase, with transactions greater than $1 billion accounting for roughly half of GP-led dealflow in 2021. This dynamic is creating structural challenges, as most secondaries buyers are constrained by single asset exposure. As a result, we are seeing transactions “led” by a number of groups, and broadly syndicated thereafter.
While there have been many new market entrants, we still do not see enough new supply to absorb all the demand, leading to longer syndication processes and deals where no bids come in because the market is so saturated. Given the supply/demand imbalance, buyers can pick and choose where they spend time and are only going after the highest quality opportunities.
Another observation is that – with large-scale GPs acquiring our peers and launching their own secondaries strategies – even with the incremental capital coming into the market, it’s unclear how it can or will be deployed. From our discussions with our core managers, there would be less comfort with GP-affiliated secondaries parties participating/leading their GP-led deals. Despite structural constraints on the demand side, we continue to see the GP-led market growing and expect it to be a key component of the overall market for the foreseeable future.
Are you observing any differences between Europe, the US and Asia when it comes to the demand and supply of GP-led secondaries?
André Aubert: The demand for GP-led secondaries transactions is much larger in the US, with the typical secondaries fund investing around 70 percent of its funds in US assets. We have built a much more diversified and balanced portfolio of GP-led deals, with up to 25 percent in Asia and an even split between Europe and the US. Our differentiated mix and experience leading GP-led transactions for more than a decade in Europe and Asia attracts a lot of GPs to work with us.
On the supply side, we see many opportunities in Asia because many funds were set up eight to 10 years ago with durations of eight to 10 years. Due to the covid-19 crisis and difficult public markets, many of those portfolios could not be fully exited, leading GPs to continuation funds. Also, even successful IPOs in Asia typically require the GP to hold public shares for up to three years, slowing down the winding down of closed-end funds and making continuation funds attractive again.
In Europe, we see a steady supply of mid-market buyout GP-led deals involving country-specific funds that often have specific structuring elements due to local requirements and teams speaking different local languages, which plays to our strengths. We also see the experience level of GPs in GPled transactions varying significantly across Europe, with many accessing the market for the first time. Finally, in the US we are seeing more large transactions relating to underlying growth equity assets in the technology sector, often syndicated to a large number of investors. That market is very deep, and we see a lot of interesting opportunities.
What are the key aspects of GP-led deals that make them attractive from LGT Capital Partners’ perspective?
AA: Generally, we are looking for experienced GPs willing to commit alongside new investors and reinvest into well performing assets. A clear process is critical so we can offer the best solution to existing LPs, the new investor and the GP.
As new investors, we are looking for the right balance of early liquidity to de-risk the portfolio and longer-term capital appreciation of the remaining assets to drive the multiple.
Finally, being aligned on asset management going forward is very important, so the GP should be willing to re-invest significantly alongside us.
How do the challenges and opportunities vary between large GP-led situations and those involving mid-sized transactions in midmarket funds?
Brooke Zhou: When you have a large GP-led situation, it often involves a large fund with a lot of assets and a wide LP base, compared with a mid-sized transaction where the fund is smaller, and the LP base is more limited. In a large transaction you would typically have an intermediary involved, given the number of stakeholders and the complexity of the portfolio. In midsized transactions in Asia, this is not always the case.
The large GP-led transactions tend to be particularly complicated and require approval from a large number of LPs. There can be limits on who can lead or co-lead the transaction as size limits that universe of potential buyers. That can be worked around of course, but it adds complexity. Sometimes intermediaries will get a group together to take the lead, or the lead buyer may not actually be that large, which makes the syndication process more complex.
The smaller transactions tend to be done in a less “broadcasted” way, which can create more interesting buying opportunities, but of course one still needs to ensure that the process is transparent and fair and takes all stakeholders’ interests into consideration.
What are the advantages of using an LP tender offer for GP-led secondaries, rather than a fund restructuring?
AD: There is no doubt an elevated need for liquidity by LPs. Fundraising cycles have accelerated, investment periods shortened, and distributions have slowed. The aggregate effect has LPs sitting on a tremendous amount of unrealized portfolio NAV. Combined with a significant correction in both public markets and fixed income, LPs are significantly over allocated and struggling to find commitments for even their most sought-after managers. This bodes well for the secondaries market in general, but in combination with a saturated single asset market we think this dynamic will lead GPs coming back to market to think more about a targeted LP tender process to provide that much needed liquidity option to help facilitate re-ups.
We’ve already started to see this dynamic play out real time, and this fits well with our strategy of targeting our highest conviction fund relationships where we have a differentiated point of view, creating a means for GPs to package up a new fund that includes a liquidity option for previous funds.
Finally, what developments do you expect to see in GP-led transactions over the coming years?
BZ: We have seen GP-led transactions develop quite robustly to a point where they are now a significant proportion of the secondaries market. That is consistent across all three geographies and is here to stay, with further growth to be expected in the future. Secondaries deals started out with a fairly simple structure (ie LP stake sales) but have become increasingly complex, for example even within GP-leds we see many variations, with various nuances and different levers that can be pulled. We expect that volume and variation to increase as an increasingly sophisticated means to providing liquidity to LPs and more options for GPs in managing their portfolios.