GP-led restructurings have been a feature of the private funds market for a number of years, facilitated by the rapid rise of the secondaries market. With high-profile secondary players holding large amounts of capital, these types of transactions have become ever more frequent among fund managers. Once seen as bespoke and perhaps a sign that fundraising was not going particularly smoothly, or that a manager was struggling to realize all of a fund’s assets, now more successful fund managers are looking to these restructurings as part of their overall management strategy. But while there are increasing numbers of these transactions taking place in the market, none are identical. Nevertheless, we’re detecting that many fall into one of two camps.
The first we call ‘end-of-fund life’ transactions. The term GP-led restructuring covers a variety of different transactions, each with different drivers. One common motivation is to provide certainty over the divestment horizon for funds approaching the end of their life which are still holding a number of quality assets that would benefit from a longer term. This is particularly prevalent in strong yield producing funds such as core real estate, or where the market is such that divestment opportunities are infrequent. Selling off assets at the end of the initial term or seeking annual extensions – which provides little certainty over the divestment horizon – may not be an attractive proposition for the manager or many of its investors. However, in finding a solution, the manager has to balance the needs of its investors which require an exit from the fund as planned, and those which wish to continue their investment.
Their attraction is that while they are becoming more standardized, there is an ability to shape the terms and the structures in a way to suit all parties involved.
Many managers structure transactions to roll assets into a new vehicle and allow investors to either move to this new vehicle or exit the existing fund entirely. New capital is injected into the new vehicle, often by secondary players attracted by the assets in question. A key issue for managers to consider when planning such a transaction, however, is valuation. This presents a potential conflict situation for the manager as it has an interest on both sides of the sale, but the deal has to be attractive for both the incoming buyer and the exiting investors for it to be successful. The price offered by the new investors could be the result of a competitive bid process involving numerous potential buyers, and this could be backed up by an independent valuation to protect exiting investors. A further but key consideration is incentives for the manager. While investors rolling over their commitments may be hesitant to change manager incentives, the previous arrangements may no longer be appropriate depending on the lifespan and objectives of the new vehicle.
The second are called ‘stapled secondaries’. While the fundraising market is currently strong for certain managers, the competition for investors’ commitments means that some managers are looking to provide additional incentives to commit to their new fund. The ‘stapled’ secondary has become ever more popular and involves combining an investor’s commitment to a new fund with a purchase of interests in a more mature fund run by the same manager. The interests in the previous fund will obviously only be attractive if the underlying assets are performing well. But if the price offered to existing investors is at the right level, it could incentivize them to also commit to the new fund. This type of transaction has invited scrutiny from regulators, however, particularly the Securities and Exchange Commission in the US, which can affect managers of US capital. The SEC is keen to make sure that existing investors are not getting a raw deal, especially in circumstances where they do not have the option to carry on holding their investment on the same terms. The two options available could be to sell their interest in the current fund or roll their investment over to the new vehicle on new economic terms. If the price being offered for their current interest is at a discount, then neither option may be attractive. Managers need to take care to analyze their own position and duties to investors, but the popularity and number of these types of transactions increasingly are showing that they can be done properly for the benefit of all involved.
But while there are increasing numbers of these transactions taking place in the market, none are identical.
There are many more types of GP-led restructurings too. Their attraction is that while they are becoming more standardized, there is an ability to shape the terms and the structures in a way to suit all parties involved. Regulators’ concerns can be dealt with and issues such as conflicts and valuations will always be present. But the current appetite of investors and managers for these types of transactions means that they should continue to be a feature of the private funds market for many more years.