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The inflexibility of traditional blind pool fundraising poses
challenges to both GPs and LPs, particularly in times of economic
uncertainty. Through tailored secondary solutions such as GP-led
transactions, continuation funds and single asset transfers, fund
portfolios are increasingly being re-structured in order to
maximize their value potential. The market acceptance of
secondaries as an innovative capital solution has propelled
transaction volume by nearly 800% from $10bn in 2016 to $88bn in
20191.
1 Preqin, ‘Why GP-Led Deals Are Re-silient Despite COVID-19’,
July 2020
RE-IMAGINING CAPITAL RAISING: SECONDARY TRANSACTIONS
The post-Global Financial Crisis (“GFC”) period has brought
consistent growth and unprecedented changes to the relatively young
and undeveloped private markets. With these changes, investors have
quickly adapted to and embraced the evolution of new-found capital
solutions in their portfolios and offerings by different market
players. In doing so LPs, GPs and advisors have become more
sophisticated, seeking opportunities beyond traditional funding
structures and time horizons.
Asante’s secondary offering focuses on engineering tailored
solutions that provide both buyers and sellers with carefully
calibrated liquidity options designed to create enhanced market
efficiencies. Similarly, our capital markets team provides
innovative, tailored proposals offering alignment for investors and
sponsors. The newsletter that follows will provide insights into
our teams’ observations in the current market as well as Asante’s
in-house expectations for where the broad capital solutions
function is headed.
Asante Capital is a leading independent private equity placement
and advisory group focused on partnering with best-in-class
managers and limited partners in both developed and emerging
markets.
ASANTE CAPITAL SOLUTIONS
Asante Capital Q3 2020 Newsletter
PRIMARY FUNDRAISING
- Private Equity- Private Debt- Infrastructure
- Real Estate- Venture Capital- Special Situations
Directs, SMAs & Co-invest
SECONDARY TRANSACTIONS
- Sale of partnership interest- GP-led solutions- Staple
transaction
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Today, the secondary market is thriving, with more buyers
seeking to take advantage of the opportunities than ever before.
What was once a seller’s market has evolved into a more balanced
one, where buyers have room for negotiation and can be selective in
their investment appetite. As a result, secondary buyers can tailor
their mandates across size, strategy, region and even down to
sector preference – a choice previously reserved only for
traditional primary investors. The influx of activity has also been
met with a significant increase in GPs seeking secondary capital,
both from new entrants and market veterans.
“Within this crowded market, there is a clear dominance of
GP-led transactions – no longer do we associate secondary
engineering with problematic funds,” – Yaron Zafir, Senior Advisor
at Asante Capital.
On the contrary, sales of LP interests have slowed considerably,
owing largely to the concern that selling now would lead to
distressed pricing at a time when liquidity pressures remain
minimal for LPs. The growing demand for GP-led transactions has
resulted in greater flexibility for the GP as well as an increase
in the prevalence of concentrated portfolios for sale. Where we
have historically seen portfolios of three to five assets rejected
on the basis of being too concentrated, buyers now see these as
diversified, and are far more comfortable in running at single
asset deals.
“In a GP-led transaction, there is significantly more
transparency and access available to potential buyers, allowing
them to make more informed and concentrated investment decisions,
whereas LP interest sales often require buyers to independently
diligence information as selling LPs either don’t have access to,
or are restricted from providing key documentation.” – Jon Graham,
Director of Secondaries at Asante Capital.
Barbarians have arrived
The rise in popularity of the GP-led solution has been driven by
several factors. In many situations, GPs require more capital
and/or time in order to drive value, particularly in light of the
difficult market conditions in recent months. Those portfolios that
are further along in their evolution also need access to the
resources provided by GPs. This option also provides the
opportunity to accelerate a primary fundraising for the successor
vehicle where an LP can provide a staple commitment on the back of
a secondary.
According to Jon Graham, “the GP-led solution has evolved from
largely esoteric to mainstream. GPs are becoming more and more
comfortable with these processes as we see the broader movement
towards this option in the market”.
What’s driving GP-led flow?
Secondaries solutions have come a long way since the GFC and
despite a few months of uncertainty around pricing this year, the
market has rebounded and robust transaction volume is expected on
the heels of heightened innovation. Key trends of which to make
note in the short- to near-term are preferred equity and NAV
lending continuing as an in-vogue choice for LPs and GPs seeking
liquidity, structured solutions for single assets and for
portfolios to provide additional capital. An increase in
continuation funds in the foreseeable future is also expected, as
are the emergence of GP stakes in the secondaries market and
considerations around tail-end assets and the automation of returns
underwriting.
Where is the outlook for the secondaries market?
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Unsurprisingly, deal activity slowed through Q2 with a pickup in
Q3. Buyout transaction volume declined significantly, some 53%
lower than the average of the prior four years. Of LPs surveyed by
Asante through the summer of 2020, 45% said they were observing
less deal flow, with 22% seeing no change and only 18% seeing an
increase in direct investment opportunities. Deal flow has
constricted in line with performance uncertainty, as fewer
founders/vendors look to sell assets for discounted valuations,
opting to wait out the virus until cash flow certainty is
greater.
Due diligence of tomorrow: Confirmatory vs. exploratory
As compared to fund diligence and commitments, direct deals
command tighter review periods; thus, we observed a clear tendency
for direct investors to go pens-down during the heightened market
uncertainty. The extended timeline on fund diligence meant that LPs
were more inclined to put processes on hold versus stepping away
all together. This same behaviour occurred as a result of the GFC
and we expect the same as a result of the current recession.
That said, there remains considerable dry powder available and
deals have continued to get across the finish line. The transition
from in person to VC meetings has been relatively smooth and the
level of diligence required has varied depending on the strategy or
sector. For example, it has been much easier for investors to get
comfortable with software and tech deals in the growth space
virtually, as opposed to a business with tangible assets that
require mulitple site visits. This trend is supported by our recent
survey which saw LPs express strong interest in technology and
healthcare vs
A Decision Delayed is a Decision Made
2 Preqin Database 2020
Once a polarizing model, viewed by some as the only option for
groups unable to raise a fund, fundless sponsors are now largely
accepted as a viable alternative to raising blind pool capital for
those managers who deliberately seek to avoid the expectations and
encumbrances that managing a blind pool fund entails. Since the
GFC, fundless sponsors have become increasingly commonplace with
investors becoming more sophisticated and adapting themselves to
the deal-by-deal model, where the LPs effectively have discretion
over the deals they want in their portfolio.
“In a time of inflated pricing, investors are enticed by
sponsors who are required to demonstrate the value in the business
they are buying and to justify the multiple they are paying – this,
coupled with greater alignment on economics, which are more acutely
calibrated, has seen the model grow in popularity for both GPs and
LPs” – Nick Palairet, Senior Advisor at Asante Capital.
RE-IMAGINING CAPITAL RAISING: DIRECTS & FUNDLESS SPONSOR
MODEL
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With fewer in-person meetings and roadshows, the pressure for an
investor to take a meeting has been removed and priority is given
to investment opportunities at what they deem to be the appropriate
time. In the now rarer cases of a physical onsite meeting, we have
observed a considerable higher bar for the stakeholders involved –
i.e. “The last thing you want to do is to show up to a vendor with
10 investors. The onsite meeting is now confirmatory vs
exploratory” says Nick Palairet.
LP preference in deal-by-deal investments
LPs are maturing into more sophisticated direct investors with
the skill sets that allow them to comprehensively analyse a deal.
As with broader private markets, capital has poured into the space
and the model is much more accepted globally today. We do not
anticipate the evolution of investors in their participation and
underwriting of more direct-like deals to pose a threat to fundless
sponsors.
The “ideal” sponsors in the space are those with an edge and the
ability to generate proprietary deal flow proactively – e.g. a
sector specialist who has worked in industry (i.e. does not share
the traditional private equity background of many industry
veterans), a regional expert, a corporate spinout, etc.
The prevalence of fundless sponsors will continue to grow as
these remain active in deals and investors further come up the
curve on sophisticated direct underwriting and structuring.
Where are we going (Near vs. long-term)?
Asante Summer Survey 2020
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W1S 3AN
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YORK, NY 10022
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CHAMPION TOWER3 GARDEN RD, CENTRAL, HONG KONG
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intended to provide a basis for evaluating any investment
acquisition or disposal. It does not constitute a financial
promotion and should not be considered as investment research,
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connection with any product or service of the Asante Capital Group.
Where relevant, this material is only being directed to
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which they are situated and no one else should place any reliance
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Asante Capital Group LLP 2020. All rights reserved.
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