This is a GP-organised secondary sales process targeted at LPs seeking liquidity. The transaction allows the GP to generate liquidity for existing investors or it can be used to reduce the old fund’s exposure to (and, thus, risk from) particular assets or sectors. The GP may establish and manage the buyer entity, thus keeping all assets under its effective control post-completion, or it may sell to third party co-investors. This involves a mature fund selling a specified selection or percentage (the so-called “strip”) of the fund’s assets. Similar in structure to a continuation fund, a single-asset recap is appropriate where there is a duration mismatch between the fund’s lifespan and a single “trophy” asset. The cash-out is typically financed by raising additional capital from new investors or ‘rolling’ investors.
Existing LPs are given the option of rolling their interests into the new fund or cashing out. If the GP of an ageing fund believes it needs more time to maximise the value of its assets than the fund’s remaining term allows, then, rather than keep extending the fund, the GP establishes a new continuation vehicle to take over residual assets. Types of GP-led secondary transaction Continuation fund: Conversely, in a GP-led transaction, it is the GP which initiates the deal, generally in the context of a fund restructuring, the objectives of which may include returning cash to existing investors and extending the firm’s control over all or some part of the fund’s portfolio. In the latter case, an LP decides to sell its interest in a fund (or, potentially, a portfolio of fund interests) and approaches potential buyers, ultimately leading to a transfer of interests with GP consent, with the buyer becoming a limited partner (and taking on the seller’s future obligations to the fund) in respect of the transferred interests. GP-leds are differenal (LP-led) secondary transactions from tradition. While the surging percentage may also be attributable to the volume of LP-led transactions falling in 2020, it is still a strong indication that GP-leds are resilient even in turbulent periods. Surveys published by Evercore and Greenhill, two specialist investment banks with significant secondaries advisory businesses, suggest that GP-led deals accounted for around half of secondary transaction volume in 2020. The fundraising boom has, since last summer, been accompanied by extraordinary growth in “GP-led” secondaries transactions. Four of the ten biggest private equity funds that closed last year were dedicated to secondaries. In 2020 alone, secondaries funds raised $100 billion. Forty years later, the biggest secondaries fund of all, managed by Ardian, has $19 billion in capital. The first secondaries fund in history raised a mere $6 million in capital back in 1981. Secondaries have been a hot topic in private equity in recent years.
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