LPs cool on tender offers as GP-led deals heat up market

GP-led liquidity options like fund restructurings represent a larger portion of overall activity in the secondary market. While total volume fell in the first half from the year-earlier period, GP-led transactions made up more than 30 percent of overall first-half volume, according to the first-half volume report from Greenhill Cogent. That’s double the 15 percent GP-led deals represented last year.

This increase was due to wider acceptance of this type of deal, along with the falling level of traditional LP stake sales, Cogent said.

Sources tell me constantly the market – like a great battleship – is inevitably turning toward this type of transaction as GPs increasingly use the secondary market to provide options to investors in older funds. Advisers love these deals because of their potential for money-making (when they close) at a time when traditional LP portfolio sales are becoming less lucrative.

LPs have mixed feelings, of course – several LPs sources have told me GP-led deals need to do more than simply be a way for GPs to extend their fee streams and potential for carried interest. They need to benefit LPs in some way as well.

Speaking to LP frustration around restructurings, while the number of GP-led transactions has increased, so have the number of broken deals and GPs who thought about testing the market but backed away.

These deals “require the right mix of motivations and underlying characteristics … to achieve a successful outcome …some GPs have experienced that this type of transaction is not a cure-all for every situation after exploring alternatives and receiving low interest or pricing,” Cogent said.

Cogent says the second half of 2016 will be marked by an increase in GP-led deals in challenged sectors like energy. Of course, one of the largest restructurings in the market today is related to the energy sector, with First Reserve trying for a revamp of Fund XI.

Tenders: Anecdotally, I’m hearing some frustration with the tender offer process – one type of GP-led transaction. In a tender offer, the GP holds an auction to find a buyer for LP stakes in a fund.

The buyer offering the highest price is not always the winner of the auction – other factors can come into play, like if the buyer offers to kick in capital to a new fund along with buying existing LP stakes.

Once the buyer is chosen, the GP goes out to the LP base with the offer, and LPs can choose to sell or not.

Sources tell me tenders have had a shaky reception in the market. Many LPs simply choose not to sell and buyers are not getting the amount of LP sales they expected. This is not true across the board, but seems to be a characteristic of this type of deal.

One issue is LPs don’t have control of the process, and don’t know whether the selected buyer is offering the highest price they could get on the market for their fund interests, a secondary buyer told me.

Also, in situations where a GP has been even moderately successful – LPs are deciding to not sell. Sales seem to be more likely in funds with angry LPs, a second secondary market source said.

Photo: Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky