Welsh Carson pulls back on potential tender offer deal

Tender offers plus staples remain challenging because if the price isn't right, limited partners can simply choose not to sell.

Welsh Carson Anderson & Stowe, out raising its 14th flagship fund, explored a secondaries sale on some of its older funds with the possibility of generating a meaningful slug of fresh capital into the new pool, but decided to pull back on the process, four sources told Buyouts.

The transaction, known as a tender offer plus staple, has become popular among GPs for its ability to potentially juice a fundraise. This is especially attractive as fundraising has slowed from its frenetic pace of the past few years.

Yet, these deals remain challenging because limited partners can simply choose not to sell. And if the price isn’t high enough, many fund investors just sit it out, creating only tepid selling uptake that can frustrate potential secondaries buyers.

Last year, average pricing for LP sales was 81 percent of net asset value, an 1,100 basis point decline from 2021, according to Jefferies full-year secondaries volume report. “Most LPs are not going to proactively take liquidity unless it’s compelling,” said an adviser with no connection to the transaction.

LP tenders represented only about 7 percent of the $111 billion of total market volume last year, according to Greenhill & Co’s 2022 volume report.

In tender offer plus staple deals, a GP holds an auction to get a price to buy out LP stakes in older funds. The buyer and price are selected, and then the offer is brought to LPs. Often, the buyer or buyers will also agree to inject fresh capital into a new fund as part of the transaction in what is known as a staple. The staple amount is determined through a ratio of secondaries sales to primary capital, usually in the range of 2 or 3 to 1, that is, for every $2 dollars of secondaries sales, the buyers inject $1 of primary capital into the new fund.

Welsh Carson’s deal would have allowed LPs in Fund XII and XIII to sell their interests in the pools. Pricing on Fund XIII was set at around a 15 percent discount, sources said. Pricing for Fund XII came in lower, though it’s not clear at how big a discount.

The deal also would have included a primary commitment into Fund XIV, which has been in the market targeting $5 billion with a $5.5 billion hard cap, Buyouts previously reported. The pool has collected at least more than $4 billion as of last year, Buyouts reported.

It’s not exactly clear why Welsh Carson decided not to move forward. The firm worked with Evercore on the process. A spokesperson for the firm declined to comment. It’s possible the firm will try again if and when pricing improves, sources said.

“If the pricing is not there, there’s no deal to be had,” the secondaries adviser said. “For tenders to work, there needs to be pricing that is sufficiently attractive to LPs and enough selling volume for buyers.”

Several tender offer deals in the market have received what market participants consider only moderate LP selling uptake. Carlyle Group has been running a large process allowing LPs in its seventh fund to sell out and would include a pledge of primary capital into Fund VIII from buyers. While that deal has not closed, preliminary estimates put selling uptake at around 2 percent of the LP base, sources said. A Carlyle spokesperson declined to comment.

Harvest Partners ran a tender offer plus staple process that received moderate sales – somewhere around 15 to 20 percent of the combined LP base across two older funds, Buyouts previously reported.

Meanwhile, across the industry, some tender offer deals have seen 30 percent selling uptake, the adviser said. Secondaries market investors expect GPs to continue trying to use tender offers this year as fundraising remains challenging.

“We’ll continue to see tenders. The reason is, it is a tough fundraising market. GPs are saying, ‘let’s go clean up the LP base and try and get something for it.’ Those of us on the buy side have better uses for our capital right now,” said a secondaries buyer, describing a plethora of quality continuation fund deals and LP portfolios for sale.

“It used to be these tenders had to happen around par [to net asset value]; now we’re talking about tenders around 80 [cents on the dollar]. It’s sort of different conversation,” the buyer said.