As GP-Led Secondaries Grow, Investors Seek Transparency

GP-led secondaries had a record-breaking 2018, but new guidelines from ILPA show that investors want more information and more time to consider the deals.

GP-led secondaries deals hit a record $22 billion last year, the highest volume ever recorded, according to data from Lazard Freres & Co. Sponsor-led deals continued apace in 2019, with Collier and Investcorp coming together on a $1 billion transaction in January, followed by Nordic Capital executing the largest-ever GP-led deal in March. If sponsor-led deals were once indicative of trouble, the stigma surrounding this part of the secondaries market has all but disappeared. But now it seems investors want to pump the brakes and get more information.

GP-led secondaries typically occur near the end of a fund lifecycle when firms want to extend an investment period to realize greater returns or give investors the option to exit. In the past, these transactions have been indicative of bad bets, or so-called “zombie funds” with struggling companies that can’t be exited for one reason or another. Today, GP-led deals are becoming more common as sponsors move to have greater control over when they exit portfolio companies. LPs can benefit from increased liquidity as well as the ability to exit manager relationships that may no longer be core to the portfolio.

Eric Albertson, senior investment director, private equity and private markets at Aberdeen Standard Investments, says the secondaries market has evolved significantly over the past decade. It started with LPs becoming more aggressive about portfolio management, using the secondaries market as a means of pruning manager relationships or buying into otherwise closed funds. More recently, Albertson says, “GPs have woken up to the fact that there is a solution for them and so you’re seeing a big wave of GPs being more active with their portfolios.”

Albertson notes that the secondaries market generally is really a source of innovation in terms of all parties being able to more effectively manage liquidity in what is otherwise an illiquid asset class. “This is how you create a win-win,” he says.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

However, new guidelines from the (ILPA) Institutional Limited Partners Association suggest that investors may want to slow things down a bit. Earlier this month, the ILPA released new guidance for investors on GP-led secondaries with the goal of standardizing the process whereby investors are made aware of fund sponsors’ desires to change things up. ILPA is calling on private equity to ensure that sponsor-led restructurings are fully transparent and that investor advisory committees have enough time to consider the transactions before they are expected to act. The association also wants investors to be able to keep their original fund terms in place and be made aware of any changes in fees if they choose to roll over their investments.

“Transparency helps everyone get comfortable with the transaction,” says Steve Hartt, a principal in the Private Markets Group at Meketa Investment Group. He notes that GP-led restructurings can be complex and conflicts can arise for investors if parties aren’t aware of all of the information before they act.

By seeking to standardize the process, ILPA may be making things easier for both investors and GPs. “GP-led transactions are always going to be a part of the marketplace and if you can reduce the friction costs of the transaction and standardize information, it will help make the market more efficient,” Hartt said.

ILPA also plans to include the new guidelines as part of its Principles 3.0 document, set for release later this quarter.

Related Stories:

ILPA Pushing Fee Template Implementation

Tags: , ,

Bolsonaro’s Brazilian Pension Proposal Passes First Legislative Test

Key panel rejects challenge to measure’s constitutionality and sends it forward.

After more than eight hours of intense debate, Brazil’s pension reform has passed the first legislative hurdle, after an important panel agreed the proposal was constitutional and pushed it forward.

The discussion between Constitution and Justice and Citizenship Commission members, which had been rescheduled following Monday’s stalemate, ended with the lower house members agreeing that President Jair Bolsonaro’s proposal is, in fact, constitutional.

They then voted 48-18 in favor of sending the bill to a special analysis committee on Thursday, according to Joice Hasselmann, one of Brazil’s congressional leaders. That group will further discuss the approved changes to the nation’s retirement plan.

Parliamentarians were concerned that the reforms were unconstitutional due to lack of budgetary and financial implication estimates.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Bolsonaro’s bill seeks to change the minimum age requirements for retirement from both the public and private sectors to help turn around the debt-stricken country. Specifically, age 65 for men and 62 for women, with the requirement that they also have contributed to Brazil’s social security system for 20 years. The current law requires 15 years of contributions for eligibility.

Analysts are expecting Congress to pass a watered-down version, to which Bolsonaro and Paulo Guedes, economy minister and one of the president’s main associates, have been openly opposed. Guedes has even threatened to resign over it.

The pension proposal is expected to move to the Senate within the next several months.

Brazil’s $67.6 billion pension debt is about 7% of the country’s gross domestic product.

Related Stories:

Brazilian Parliament’s Decision on Pension Reform Delayed

Brazil’s Military Now Part of Pension Reform

 

Tags: , , ,

«