A coming of age for GP-led secondaries

What is needed to ensure GP-led deals get across the line?

Stefano Manna: Over the past couple of years, GP-led transactions have evolved to meet the different situations and goals of GPs. As well as providing an alternative solution to a range of challenges faced by GPs, they can also offer an alternative exit route to a sale or IPO.

There are a number of factors that are key to getting these transactions over the line. The first issue is identifying the correct deal type: should a GP explore a single or multi-asset continuation vehicle, for example?

Most multi-asset vehicles are run when funds are nearing the end of their lifespan, as they allow the GP to retain a number of valuable assets for longer and provide a liquidity option to existing LPs.

Meanwhile, single-asset transactions work well for high-performing, individual trophy assets that GPs want to hold onto for a longer timeframe. Of course, there are many nuances and variations in between these approaches. Next, it is about structuring and the rationale behind the transaction. One key to a successful process is starting early with the planning, including the legal and tax aspects of the deal, because these are all really important elements.

Down the line, there will likely be some conflicts – either real or perceived – so early and transparent engagement with current and potential new investors is always strongly encouraged.

Finally, as both new and existing investors will be assessing the appropriate value for the continuation vehicle, proper price discovery is vital, more and more often combining with M&A processes. Advanced asset-level due diligence is also a key feature, particularly on single-asset deals.

What do LPs find attractive in a continuation fund?

Stefano: This is an interesting question, because both existing investors in the legacy fund and new buyers of the continuation vehicle would potentially be LPs in the new vehicle. That means there must be a good rationale for the creation of a continuation vehicle, and the underlying company (or companies) will need to be performing well. Crucially, the LPs are going to be focused on aligning their interests with the GPs sponsoring the transaction.

So, depending on the scenario, some LPs will be attracted by the opportunity to rollover their investment, while others may simply seek additional liquidity. Continuation funds can facilitate alignment with GPs, as investors expect to see GPs reinvest carry to increase that alignment. Ultimately, the existing investors have optionality and are the first to consider what happens. Throughout that process, communication must be the priority.

How do continuation fund processes work in the case of co-investments?

Stefano: In continuation funds, the alignment of interests is paramount for buyers, so it is increasingly common for GPs to roll over the majority, if not all, of their crystallised carried interest and to contribute additional commitment, in some cases including investments from their latest flagship fund. That is why these deals are seen as an opportunity to drive further alignment with LPs; they give GPs the chance to double down on specific assets’ future upside. If done well, that fosters a well-incentivised collaborative partnership.

At Investec, for instance, we assist GPs navigating these complexities, including regarding GP commitments and carried interest treatment. On the primary fundraising side, a 2 percent GP commitment is typical. But the higher the GP commitment, the easier it can be to position these continuation vehicles as attractive opportunities.

Is growing deal flow changing the way buyers access GP-led opportunities?

Stefano: Over the past decade, the GP-led market has grown significantly. These deals now represent around 50 percent of the total secondaries market – compared to a fraction of that 10 years ago – and the market has evolved to include both multi-asset and single-asset vehicles.

As a result, GPs are more open to exploring these deals, and buyers are increasingly specialising in either larger funds that can absorb larger transactions, or newer market entrants that cover the mid-market and the lower mid-market. We also see private equity funds launching single-asset strategies to capitalise on the growing number of assets going into continuation funds.

These are all positive dynamics, because the more deals there are, the more familiarity there is with the transaction process. Furthermore, as buyers increasingly work with advisers to help them navigate and better understand both the sectors that the companies in the continuation vehicle operate in and the value of the underlying assets, we see those managers building up track records. All of this enhances market access for buyers and drives growth in the sector.

What is driving the increased use of continuation funds in the European mid-market?

Stefano: Players in this part of the market see these deals as a positive opportunity, particularly as a method to retain their best-performing assets when a fund may be nearing the end of its life. A continuation fund can help to bridge gaps by providing GPs with both the time and resources to keep on supporting assets, while at the same time de-risking their fund.

These also present a good opportunity for GPs to build relationships with strategic LPs, providing their investors with liquidity and creating further support for franchises going forward.

In the European mid-market, the GP rollover is an important aspect of deal structures given that the economics are different to the larger end of that market. That is why our approach at Investec is focused on supporting these processes and structuring deals to ensure alignment of interests.

Which sectors, geographies and strategies do you expect to prove fertile ground for GP-led transactions moving forwards?

Stefano: Some of the most sought-after sectors for these opportunities are technology, healthcare and services. Particularly on single-asset deals, buyers like to see a clear consolidation play in a sector, and they particularly like evidence of a buy-and-build approach already playing out for other private equity funds. That said, we also see deals happening in different sectors, including consumer and industrials, so it is really all about the equity story and the opportunity.

In terms of geography, we are seeing more of these deals across Western Europe, including in newer markets like Italy, where such transactions were rare in the past.

Thinking strategically, there are a lot of opportunities in anything ESG-related, with a growing trend for continuation funds that are Article 9. That plays into a broader theme across the private equity industry and shows how the level of sophistication is increasing in this sector.