Anyone involved in secondaries knows the GP-led part of the market is burgeoning. These deals accounted for more than a quarter of the $58 billion in dealflow in the first half of the year and were the topic du jour at a private equity industry conference in London earlier this month.
Processes involving brand-name GPs such as Thomas H Lee Partners, L Catterton and TPG are understood to be underway, with UK stalwart Charterhouse Capital Partners the latest to throw its hat in the ring, as we reported earlier this month. There are likely to be more – we hear a couple of other blue-chip name deals are set to hit the market before year’s end.
The increasing acceptance – and critically, success – of GP-led deals has opened up opportunities in the lower end of the market. Market sources tell Secondaries Investor that successful brand-name deals have given smaller managers the confidence to run similar processes on their funds, and that these are closing.
There are a few curveballs in these transactions. Private equity funds of $100 million or less tend to have a higher proportion of high-net-worth individuals who commit as individual limited partners in a vehicle, as opposed to via a feeder fund structure.
“Reaching out to a high-net-worth who may be on the beach at Saint-Tropez to ask them if they want to roll over their $600,000 stake can be a bit awkward,” says one London-based secondaries lawyer. The sheer number of HNWIs can mean – unless they accessed the fund through one collective feeder vehicle – advisors’ and lawyers’ time is spent chasing individuals, rather than their collective feeder fund representative.
It can also throw up potential regulatory issues. A HNWI may have committed to a fund more than 10 years ago when regulations designed to protect individual investors were not as strict. Now, individual investors must meet specific requirements in order to invest in private equity. This can cause problems when an advisor needs to offer an individual investor a status quo option in a GP-led deal, as the creation of a new vehicle that mimics the terms of the original fund technically requires the marketing of a new security.
For now, such problems remain confined to the smaller end of the market. But the more the GP-led market grows and the more private equity firms work out how to tap retail investor capital, the more these issues are likely to pop up.