Providence gets strong uptake on Fund VII secondary that includes staple into Fund VIII

Providence Equity’s process to allow existing investors in Fund VII to cash out of their stakes in the fund looks to have paid off, with about 15 percent of existing LPs choosing to sell, sources said.

The process, known as a tender offer, hinges on whether existing LPs choose to sell. Buyers in such processes generally want to see a certain level of selling LPs to make the deal worthwhile.

In this case, early estimates showed between $800 million and $900 million of existing LP interests trading, sources said.

The Providence process also included a shot of fresh capital into the firm’s eighth fund, which is in market, targeting $5 billion with a $6 billion cap.

With $900 million of LP sales, the injection of fresh capital — known as a staple — could be around $450 million, sources said.

In a tender offer, a GP pre-selects a buyer and sets a price for existing LP stakes. In this case, Canada Pension Plan Investment Board led a buyer consortium that included HarbourVest Partners and StepStone Group.

The buyers offered existing LPs a 3 percent premium over net asset value as of a reference date of March 31, 2018, for their stakes in the fund, sources told Buyouts in prior interviews.

Deal leads included Sebastien Siou for CPPIB, Michael Pugatch for HarbourVest and John Kettnich for StepStone, sources said.

Park Hill Group worked as intermediary on the deal. A spokesman for Providence declined to comment.

Providence closed Fund VII on $5 billion in 2013. Fund VII, a 2012 vintage, was generating a 23.2 percent internal rate of return and a 1.88x multiple as of March 31, 2018, Oregon Public Employees Retirement Fund information shows.

It’s always a challenge to get LPs to sell if there is no compelling reason for them to bail out of a fund. However, in some cases, even a well-performing fund like Fund VII, LPs who aren’t going into the GP’s new fund could be good candidates to sell their interests.

In the past, large deals have fallen apart after not receiving much interest from existing LPs to sell their stakes. One of the highest profile tender processes was First Reserve, which was running a restructuring on its 11th fund in 2016. The proposed offering would have allowed existing Fund XI LPs to sell their stakes or roll with the GP into a new vehicle that would house remaining Fund XI investments.

Pantheon and Intermediate Capital Group were lined up to buy LP stakes, but the two firms decided to back off after the deal generated only about $88 million of existing LP sales. The two firms had a minimum target of $175 million of existing LP interests with a maximum of $400 million, Buyouts previously reported.

GP-led deals, like tender offers, represented 24 percent of total market volume of around $58 billion last year, according to Greenhill Cogent. This included more than 10 GP-led transactions of more than $500 million, the intermediary said.

GP-led deal volume hit an estimated $14 billion last year, up from $9 billion in 2016, Greenhill Cogent said.

“A new class of high quality, brand name GPs has entered the GP-led market to proactively provide liquidity options to their limited partners. The use of secondary market solutions has become increasingly accepted, paving the way for other quality GPs to consider transactions,” Greenhill Cogent said in the report.

Action Item: Check out Providence’s Form ADV here: https://bit.ly/2HKeYnR