How to close a stapled deal

Two vital things a GP needs to consider when trying to use the secondaries market to help their latest fundraise.

Providence Equity Partners is currently ironing out details of a high-profile secondaries deal. The firm is inviting secondaries buyers to offer liquidity to limited partners in an older fund and provide a boost to its current fundraise.

The Canada Pension Plan Investment Board is the lead buyer in the deal, according to sister publication Secondaries Investor, and will be joined by HarbourVest Partners and StepStone. They are offering to cash out LPs in Providence’s 2011-vintage fund and commit primary capital to its latest vehicle, which has raised more than $4 billion of its $5 billion target.

GP-led secondaries transactions are a relatively new deal type. This will be – assuming it closes – the first example of a sizeable, healthy North American firm initiating a GP-led secondaries transaction with a stapled element. As SI noted, it could open the door for other blue-chip general partners to follow suit. In Europe, BC Partners’ successful stapled deal led to firms like Nordic Capital and EQT running processes.

These are complicated and delicate transactions. So what are the considerations that Providence – and its advisor Park Hill – will need to be on top of to get the deal done?

Genuine LP optionality

In a tender like the one Providence is running, you’re given a liquidity option, not an obligation. LPs may not like what’s being offered but they have an option to turn it down. As BC Partners’ then head of IR management, Laura Coquis, said of her firm’s deal: “One of the criteria we absolutely had was, for those who just want to ignore it, they have the option to ignore it and everything continues as they expected when they made their original commitment with us.” Any GP wishing to follow suit would be well advised to offer the same option, she said.

Make sure the price stands up to scrutiny

“The only time where an LP would get hurt is if they’ve found another buyer at a higher price, but that doesn’t offer the staple and then the GP wouldn’t give consent to that buyer. That’s a problem,” said one banking source. This cuts to the heart of a potential conflict that needs to be carefully managed. As the banker notes: “The question that comes up with these deals is how much did the stapled primary commitment influence the price being offered, or did it not?”

If LPs think the auction was not competitive and the price has come up short, then they will not feel good about moving forward. It is worth noting that – technically anyway – any LPs that want to sell but do not like the price are free to seek buyers independently.

While we don’t know exactly how large the Providence deal will be, it’s sure to be big compared with previous US transactions. Given the amount of secondaries capital being raised – large players like Ardian, Lexington and Strategic Partners are building up their firepower – we can expect it to be the first of many.

As LPs begin to see the benefit of these deals, they will start raising the prospect with their managers. GPs that choose to initiate a process should think hard about price and optionality.

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