Avoiding conflicts in stapled deals

Looking for a way to kickstart your fundraise or bring it over the line? The secondaries market may have the answer: stapled deals.

Such transactions – in which a buyer typically acquires stakes in a general partner’s fund and simultaneously commits to the manager’s fund in market – have made headlines in recent years. Brand name GPs including BC Partners and Providence Equity Partners have used them to get their fundraises to the line, while offering liquidity to limited partners who wanted an exit.

Stapled deals have been known to deliver high prices for sellers: limited partners who sold in Providence’s process last year received a 3 percent premium to net asset value, while LPs in BC Partners’ 2017 process walked away with a cool 14 percent premium. Yet, for a tool that can deliver the Holy Trinity of wins for LPs, GP and secondaries buyer, stapled deals can be fraught with potential conflicts of interest related to pricing.

Ted Cardos, a partner at law firm Kirkland & Ellis, says it’s important to differentiate between two main types of stapled transactions. In a stapled tender offer where a buyer is offering to acquire LPs’ stakes, there is no real conflict of interest as the offer is non-coercive.

“If they don’t like the price, they don’t have to take it,” Cardos says. These processes may even drive up pricing as the manager has opened the books to potential buyers, as opposed to an LP-led process in which the GP plays little part.

Whether the GP has found the highest price is a thorny issue. In theory a GP has no fiduciary obligation to its LPs to maximize price for their stakes if they wish to exit the fund. In practice, LPs finding out they’re being offered a lower price for their stakes because the GP chose a buyer who could offer a staple have some reason to feel hard done by.

At a recent secondaries panel discussion in London, Chi Cheung, a partner at secondaries firm Glendower Capital, recounted an example in which he was asked by both the GP and its adviser not to participate in the final round of a tender offer because his firm’s bid was higher than that of a rival who was offering a staple.

“When you’re backing a GP, the transaction is really a partnership,” Cheung said. “When you create a level of distrust that you might be the next investor to be screwed over, you’re going to want to walk away.”

Where things become even trickier is if the staple is part of a GP-led restructuring where assets are “acquired” by a fund managed by the same GP and may generate carried interest. LPs will question whether the staple was a requirement to win the deal and whether the assets could have fetched a higher price in a non-stapled process.

“That puts a lot more pressure on the GP to say: the staple has not reduced the price,” says Cardos. “It becomes a lot more fact specific and it would be helpful in such circumstances to have a fairness opinion so the GP can say with some degree of confidence that this price was truly fair.”

Ultimately, disclosure makes all the difference. Hardwiring a stapled component into a GP-led secondaries process and then being upfront with LPs that the price they’re being offered has been diluted – if it has – by a simultaneous primary commitment is the only way to mitigate conflicts of interest, regardless of the type of staple being proposed.