Stapled secondaries moving upmarket

Stapled secondaries deals – whereby buyers of LP stakes in private equity funds commit additional, primary capital towards the manager's next vehicle – have become a much talked-about feature of the market in recent months. A significant milestone was reached in April, when Ardian invested a total of $2.5bn in a transaction with Mubadala Capital, the financial investment arm of Mubadala Development Company, via a secondaries deal (including a mix of direct stakes and LP interests) and a $750m primary commitment to a new fund. The transaction was regarded at the time as one of the largest staples ever attached to a secondaries deal.

This could soon be matched though, as BC Partners is nearing a stapled secondaries transaction that could see the GP raise a sizeable commitment to its latest flagship fund, according to two sources familiar with the situation [Editor's note: BC Partners is the majority owner of Acuris, the parent company of unquote"]. At the time of writing, Lexington Partners was understood to have agreed to buy €1.2bn of existing LP commitments in BC European Capital IX (BC IX) while also committing up to €600m to BC European Capital X (BC X), currently being raised. According to both sources, BC X had raised €6bn prior to the potential Lexington transaction, which is being intermediated by Campbell Lutyens.

BC Partners declined to comment when contacted by unquote".

BC IX closed on its €6.5bn hard-cap in February 2012. LPs in the vehicle include California State Teachers Retirement System, Canada Pension Plan Investment Board, Iowa Public Employees Retirement System and Korea Investment Corporation, among a host of international institutional investors.

BC X was launched in early 2016 with a €7bn target and had secured approximately €4bn in commitments as of September 2016 from more than 50 investors, including pension funds, fund-of-funds managers and insurance companies, according to unquote" data.

GP-led, mark 2
Staples have become an increasing feature of the wider GP-led secondaries process, as Campbell Lutyens CEO Andrew Sealey points out: "The GP-led deals have been around for years – in fact, we were already advising on some of these after the dotcom bubble in 2002, doing tender offers for funds. They came back in fashion after the financial crisis, particularly around managers that had underperformed and couldn't raise capital. Typically these included staples and saw the economics being reset. What's happened since then is that higher-quality managers have seen the opportunity to achieve other objectives using the very hot secondary market. This shift is really the overarching trend behind these transactions at the moment."

Sunaina Sinha, managing partner at placement agent Cebile Capital, agrees that the BC Partners transaction could be seen as further proof that top-tier managers are increasingly looking to capitalise on GP-led secondaries deals, overcoming the stigma attached to these in the past. "What the BC Partners situation highlights is that it is becoming more and more acceptable for GPs to consider and actively pursue GP-led restructurings," she says. "These, including stapled secondaries, have been a feature of the market for some time now but what is unique about BC is that it is arguably a top-tier GP doing it, whereas previously it might have been reserved for trickier situations.

"You will increasingly see these taking place for brand-name GPs, as they come to realise they can take control of secondaries transactions that would be happening anyway and using them to their advantage," she says.

Higher-quality managers have seen the opportunity to achieve other objectives using the very hot secondary market. This shift is really the overarching trend behind these transactions at the moment" – Andrew Sealey, Campbell Lutyens

Lingering doubts
Not everyone in the market sees these transactions as completely stigma-free though, with some pointing to the fact that BC X was launched 18 months ago, while some other large private equity houses have been closing multi-billion vehicles in short time-frames. "They are a top-flight GP, but the truth is that BC is taking longer than expected to reach its target," says an adviser who wished to remain anonymous.

Speaking to unquote", the local head of an international fund-of-funds manager adds that he was doubtful stapled deals would become a fixture of fundraises for the most successful GPs: "We don't really look at stapled secondaries. The market will increasingly see more of them in general, but the likes of CVC or Advent will not do them any time soon. It's really for raises that are not doing so well."

But one of the aforementioned sources familiar with the BC situation insists that the deal is driven more by the secondaries portion – namely strong demand on the buy-side for stakes in BC IX and the ability to offer liquidity options for existing LPs in the vehicle, which would crystalise a 19% net IRR should they sell – rather than pure fundraising concerns for the firm's new vehicle.

Fundraising considerations aside, stapled deals have historically had to contend with the criticism that existing LPs could be penalised on the secondaries portion of the deal due to the staple. "For existing LPs the choice is somewhat constrained. Pricing is directly influenced by the staple element and therefore doesn't necessarily reflect the best market value," says Access Capital Partners managing partner Philippe Poggioli. "But if, on the other hand, they opt not to sell and do re-up in the new fund, the commitment period becomes longer and involves new money, which is not necessarily in their best interest either."

Campbell Lutyens' Sealey sees where the controversy surrounding pricing is coming from, but he and other market participants contacted by unquote" point out that it will become increasingly less of an issue as the market refocuses on higher-performing managers. "If you have a good enough quality GP where the new fund has already attracted significant commitments – and this is something we have seen more of recently – then the argument loses relevance," Sealey says.

Conflict prevention
This also applies to the wider concern that GP-led secondaries (with or without staples) inherently pose a risk of conflict of interest. Says Poggioli: "GPs have really caught up with the rules of the game and are increasingly driving processes. In addition, advisers have also been quick to realise how profitable these situations could be for them. Some are adopting an almost activist approach – trying hard to convince GPs they should make the best out of a bad situation, sometimes to the detriment of their existing LPs. Conflicts of interest are hard to avoid."

Both Sealey and Sinha note that processes will inevitably become more transparent as the market continues to mature. "No one is forcing these LPs to sell, and in a straight staple deal I wouldn't see a problem with mismatches between returning and stapled LPs in the new vehicle," says Sinha. Meanwhile, Sealey insists that transparency and a focus on preserving as much of a status-quo as possible between different sets of LPs are now key for these processes to succeed. In the case of the BC transaction for instance, unquote" understands that LPs in the BC IX fund would see no changes in their fund terms if they choose not to take part in the process.

Although the market is undeniably shifting towards non-distressed situations, GPs will most likely continue to face scrutiny surrounding the motives and ramifications of stapled secondaries deals for some time. The amount of primary capital and attractive LP liquidity options on offer for the best managers will no doubt be worth the controversy, though.

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