Why LPs are frustrated with single-asset deals

GP-led deals focusing on one asset or concentrated assets have exploded in both number and as a percentage of secondaries market volume in recent years.

The focus on single-asset GP-leds comes amid an increase in activity for the sub-strategy, accounting for almost 40 percent of manager-initiated secondaries processes last year, according to data from Greenhill. Data from Lazard shows single-asset processes accounted for 52 percent of sponsor-led deals by volume last year, compared with 38 percent the year prior. Go back a couple of years and none of the major secondaries advisers even mentioned the words “single-asset deals” in their annual reports.

The flurry of activity has, in part, spurred the Institutional Limited Partners Association, the private market industry’s most influential LP representative body, to set about producing specific guidance on single-asset deals to better equip the investor community to respond to such transactions should they arise. ILPA is understood to have held a virtual town hall meeting in early March to discuss the topic with members and is planning to issue its guidance this year, though the exact scope of the guidance is yet to be decided.

At the heart of the matter is the simple fact that LPs are being pressed to make complex decisions about single-asset processes more frequently and with shorter lead times than ever before.

“The idea of being presented with something with a limited amount of time, where you have to take on another one-off process for a particular asset, is difficult if not impossible for LPs,” Neal Prunier, director, standards and best practices at Washington DC-headquartered ILPA, tells affiliate title Secondaries Investor.

ILPA eyes single-asset secondaries market for next guidance

The moves come three years after the LP representative body issued its initial guidance on GP-led fund restructurings

The private equity industry’s most influential investor body wants to help limited partners better understand and deal with processes around the secondaries market’s fastest-growing segment.

ILPA is in the early stages of working on guidance around single-asset GP-led deals, a spokesperson for the organization confirmed to affiliate publication Secondaries Investor. It is understood ILPA is consulting member firms about the upcoming guidance.

The GP-led area in general has attracted the attention of financial regulators. The US Securities and Exchange Commission is proposing enhanced disclosure rules that would force private equity managers to report more information specific to areas including GP-led secondaries deals.

The rules, which would be required as part of an enhanced Form PF, would be a drastic enhancement of the kind of information private equity managers have traditionally disclosed. Regulators believe more information is necessary to properly understand private equity operations.

The proposal comes as the SEC under chairman Gary Gensler puts private equity under tighter scrutiny, with the intention of squeezing more information out of managers who have historically operated without much transparency.

The SEC’s proposals are in a public comment phase before they receive final approval.

ILPA supports the mandated use of the Form PF, which was required by the Dodd-Frank financial reform act in 2010 as a way to track systemic risk in private funds. SEC-registered investment advisers are required to file the Form PF each quarter or on an annual basis.

The LP representative body already has existing guidance on GP-led restructuring processes. In November, it published an update to its Due Diligence Questionnaire, which includes guidance on GP-led secondaries and continuation funds. The body published its specific GP-led secondary fund restructuring guidance in 2019.

There appear to be multiple frustrations from the LP community. One main sticking point is the short period of time – sometimes as little as 10 business days – by which LPs must decide whether to sell or roll their exposure (or stay invested on the same terms in the event a status quo option is offered, which isn’t always the case).

Then there’s the question of fees, in particular having a different set of fees associated with the continuation vehicle in addition to the existing fund.

LPs are also annoyed at the amount of work required to make a decision on what is essentially a process of conducting due diligence on and underwriting an investment in a company – not necessarily the sweet spot of an LP whose skills are traditionally focused on doing diligence on a fund as a whole. And while, yes, LPACs are engaged at an early stage to give the green light on conflict-of-interest waivers, some feel the information they’re given to make such decisions often lacks the crucial elements that end up being the components of the deal, such as how the asset is valued, terms of the LPA or fees.

At a time when LPs are being inundated with fundraising and re-up opportunities at unprecedented rates in the industry, often the last thing they need on their plate is having to make a decision about a star-performing asset in a fund they have already backed. Not to mention the idea that LPs have likely supported this star asset from day one as an investor in the fund and are now not able to fully capture the upside benefits since they are not participating in the continuation fund at a high rate, says Prunier.

Skepticism abounds about whether the rise of the single-asset market is a positive development for investors such as pension funds and sovereign wealths. More GPs choosing to hold onto assets via such deals means the pool of companies for institutional investors to invest directly in becomes smaller. Ultimately, this means lower returns for beneficiaries, the skeptics say.

Secondaries Investor understands that ILPA is planning to take a balanced approach in putting together its guidance and seek perspectives not just from LPs.

While the views of GPs, secondaries buyers, the advisory community and legal experts will all help inform ILPA’s guidance, a frustrated limited partner community clearly isn’t a good thing for long-term health of the secondaries market or its growth.

CPPIB’s stance shows that single-assets and co-investments can co-exist

Skeptics say concentrated GP-leds are an expensive way of doing co-investments; the Canadian pension believes the two markets address different risk/reward profiles

In mid-March, CPP Investments, a bellwether of private markets investing, had a change of heart when it comes to single-asset deals, the fastest growing subsector of the secondaries market.

The pension plan will write checks of up to $100 million per deal and wants to invest up to $1 billion per year via the strategy.

The move is significant for at least two reasons. The first is that CPPIB will back deals with managers even if it doesn’t have existing relationships with them. In other words, it’s open for business in the same way that any other buyer in the secondaries market active in single-assets is, and it doesn’t see this simply as a way to leverage its existing GP relationships.

That the C$550.4 billion ($432.8 billion) pension is also able to provide stapled capital in various forms – hard or soft, as recently described to Secondaries Investor – should be icing on the cake for any GPs out there looking to hold a prized asset for longer and form a relationship with the world’s biggest investor in private equity.

This is also significant because it is further evidence that the single-asset GP-led market and the direct co-investment market can co-exist in the eyes of a major institutional investor like CPPIB. Until now, the pension hasn’t backed single asset sponsor-led deals, preferring instead to gain concentrated exposure to PE-backed unlisted companies via co-investments, which typically do not attract fees and carry as they sit outside a fund structure.

In giving its secondaries team the green light to invest in these deals – and crucially, the pension isn’t reducing its direct investment activity – CPPIB is acknowledging that single-assets can be as attractive as opportunities found in the directs market, just with a different risk/reward profile.

Additional reporting by Chris Witkowsky and Rod James