Secondary intermediary Probitas Partners confirmed it is in discussions to create a liquidity vehicle that pairs sovereign wealth fund money with cash-strapped LPs. The vehicle, called Prospective, aims to bridge the pricing disparity between sellers and buyers of secondary limited partnership stakes by splitting the commitment.
Prospective will separate LP stakes into funded and unfunded portions. The buyer—a SWF, potentially—agrees to fund future capital calls, and the seller—the current LP stakeholder—can still participate in the upside of its invested capital without taking a loss on the deeply discounted secondary market.
“Some of the people who have large positions in ‘07 funds don’t feel like taking huge writeoffs on their already invested capital,” a Probitas representative said. “But they can’t fund ‘09 ‘10 draw-downs. If you’re the purchaser it allows you to synthetically generate ‘09 vintage investment,” the representative said.
This benefits the secondary seller, who may face capital constraints on future capital calls but does not want to exit the private equity investment altogether. Further, there is still potential upside, as the seller won’t lose money on its investment in a distressed secondary transaction.
In some ways, the set-up is similar to the synthetic secondary deals we’ve written about in the past. It uses new money to fund future capital calls, without forcing a cash-strapped LP to fully exit at an undesirable price. However, Probitas’ vehicle is formalized and even has a pending patent.
Capital calls could indeed be major a problem for LPs in the coming months. Some of the largest firms, like Blackstone Group and KKR, have said they are hungry to make acquisitions while valuations of companies are at their lowest, yet they are in no hurry to exit any of their current investments at such levels. Meanwhile, Goldman Sach’s private equity group, GS Capital Partners, has asked its LPs for permission to use half of the remaining $9 billion in its latest fund for distressed debt purchases. Once those capital calls from such acquisitions crop up with no distributions from exits, LPs may be desperate for a partner to cover the capital calls.
Prospective hasn’t done a deal yet as it is still in the formation stage, but has been in discussions for around three months.