GP Led Secondaries Questions

Hi All,


Delving into the world of Secondaries with some upcoming processes and would appreciate some clarifications as its a more niche area where there isn't as much info around. Any info is much appreciated!


  1. Rationale for doing a multi-asset vs single-asset deal from GP manager perspective and investor perspective

  2. Differences in pricing/discount to NAV for GP led middle-market continuation vehicles vs large-cap CVs

  3. Rationale for choosing to invest in a middle-market CV vs a large-cap CV from investor perspective

  4. If the GP is buying into the CV from their new flagship fund, does that tell you they're underselling the asset if they're a willing buyer at this price or is that a sign that they're confident the biz will achieve the business plan

  5. Differences in European and American PE waterfalls and how that relates to Secondaries buy-side in European vs American context e.g. perhaps in terms of rationale for doing a GP led and crystalizing carry

  6. How does pricing in the LP led market affect pricing in GP led market and/or vice versa

 
Most Helpful

There’s a lot there so I’ll try to be concise but want to note there’s always nuances to this so some of the below could be considered generalizations. But happy to dig deeper into any one answer.

1. Rationale: MA CV from a manager perspective the core focus is usually increasing overall fund DPI and/or cleaning up an old fund. For SA CV it’s much more focused on getting more capital and time for a star asset that has a lot of room left to run. In a SA the GP has typically hit concentration limits or time limits in a legacy fund (these same points can apply to MA as well). From an investor’s perspective, in a MA CV you of course get the benefit of greater diversification than a SA CV. But, in both cases, it’s more concentrated than a LP portfolio secondary so there’s higher risk but you have the ability to underwrite individual assets at a deeper level. CVs in general can provide secondary investors with a higher multiple opportunity than a typical LP portfolio would. Usually, these assets are the best from a GP’s fund so you’re getting exposure to really strong assets that a GP is already familiar with. Final point on MA vs. SA, there’s a larger universe of buyers for MA and therefore they can be easier to get done given there’s more capital available to invest in them.

2. Differences in pricing: pricing on a basis of NAV is less tied to the size of the asset / deal and more tied to asset quality, GP quality, and where the GP has the asset marked.

3. Rationale for MM vs. Large Cap: given the return objectives of a secondary fund, CVs can provide greater multiple uplift but they can be a drag on IRR for the overall fund. So path to exit and hitting that timeline is very important. With a MM company, there is a larger universe of potential buyers from strategics to sponsors. If a company is large enough where the most likely exit is an IPO, that just creates exit timeline risk which secondary investors don’t like. That said, with a large-cap company you’ll likely be dealing with an industry leader that has scale and the ability to tac on accretive M&A which is another story that’s easier to underwrite.

4. Flagship fund buying in: majority of CVs are completed within a 10% discount of NAV so they are pretty close to the GP’s existing mark. The GP rolls 100% of their proceeds into the CV so in theory they should be indifferent to price since they are keeping their exposure (there’s a dirty secret to this aspect but won’t get into the details for the sake of this). The flagship fund investing is really a show of confidence and an alignment aspect. Shows the GP believes in the business enough to double down AND keep it on their primary track record.

5. All CVs are European waterfalls. Just means you run distributions through the waterfall on a fund basis vs. asset by asset. So, the GP doesn’t get any carry until the CV returns 100% of LP Capital plus the hurdle rates (usually tiered in a CV).

 

Legend, thanks, will be super helpful for everyone!

Couple of follow-ups

4. I guess more thinking, with GP leds, there is conflict of interest, the GP is both buyer and seller but if they're buying into it from the main fund, doesn't that show they overall are a buyer and that the existing LPs are getting a weak price

6. Any thoughts on this one, I edited probs while you were typing so maybe didn't see the last point

7. From what I understand we're seeing quite a few CVs particularly Single Asset ones trading at par or above par, is this indicative of anything else other than strong demand for the asset?

8. As a GP, what is my role on an LP led that concerns my fund, just giving consent? Is there anything in it for me?

9. As an investor, beyond concentrated exposure to what I think is a trophy asset, why would I prefer investing in a GP led over an LP led all things being equal and why would I prefer investing in an LP led over a GP led all things being equal

 
  1. Yeah you’re right, there’s a lot of conflicts to navigate. Firstly, a CV isn’t meant to produce a value maximizing price. It’s simply a mechanism for GPs to cash out existing LPs at or near the current mark. That’s why they only work on trophy assets because the existing LPs have typically already achieved greater than 2.5x net on their original investment. To help mitigate this conflict, existing LPs are typically given the option to roll over on their same terms (status quo option). Status quo options aren’t perfect because if there’s unfunded then those LPs will get diluted but it’s the closest thing to “fair” that you can offer.

  2. (6. LP pricing) it’s about relative value. When LP pricing is really good (large discounts) then LP portfolios are more attractive compared to CVs because most CVs won’t get done at a larger discount than 10%. Also, from the perspective of a secondary investor, why would you buy an asset at NAV when you can buy the entire portfolio for much cheaper via an LP-led.

  3. Really just strong demand for the asset. I have heard in rare cases a GP getting above par because their mark was just way too conservative but it’s usually a product of demand.

  4. Just consent. GP should technically not be involved at all but sometimes they can get a staple from the incoming secondary investor. Depending on the size of the transaction they can sometimes be available for GP calls.

  5. It really comes down to different risk return profiles. With an LP-led you can achieve much greater discounts than a CV, you’ll get distributions faster (higher IRR), and get a lot more diversification, but the overall multiple tends be lower. The risk/return profile on a CV is more similar to a direct / co-investment with the exception of the GP already being familiar with the asset which should be beneficial for returns and downside protection. You can also underwrite individual asset risk in a CV. So, in times like 2020/2021 where there’s a lot of uncertainty in the market, it’s easier to deploy capital into a deal where you know exactly what the risk is versus a large portfolio that’s harder to underwrite individual asset risk.
 

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