1. Fund restructuring

How does it work
In a fund restructuring, also called fund recapitalization, the GP moves assets in an older fund into a new special purpose vehicle. The GP offers its LPs the possibility to sell their interests in the fund and cash out or have the option to roll over into the new vehicle. The SPV – known as a continuation fund – has new fund terms, including life span and the economics.

When does it work best

The fund has several assets left but it has reached the end of its life. The GP needs more time and more capital to ready the assets for a sale and some LPs are ready for liquidity.

What can go wrong

If pricing isn’t attractive and not enough LPs want to sell, the deal may not go through. Fund restructurings need to be win-win-win for the GP, the LPs and the secondaries buyers and not solely a way for the GP to reset the fund’s economics.

Example

In a record-breaking deal in 2018, Coller Capital and Goldman Sachs backed a €2.5 billion fund restructuring of Nordic Capital’s 2008-vintage vehicle. Nordic transferred nine companies to a new fund structure, giving the assets five additional years and fresh capital.

2. Tender offer

How does it work

A GP holds an auction to find a secondaries firm that offers to buy up to a certain amount of fund interests from existing LPs. LPs can either choose to take up the offer of liquidity or remain in the fund. The economics aren’t typically reset in a tender but there’s often an extension of the fund life.

When does it work best

When the GP or its advisor has run a competitive process resulting in a price sufficient for LPs to want to sell.

What can go wrong

There is no LP negotiation, so investors can only accept or decline an offer. If too few LPs agree to accept the offered price – and the total deal size does not meet a certain threshold – it may not go through.

Example

In late 2018, Lexington Partners backed a tender offer for TPG Capital’s fifth and sixth Asia funds. The transaction also involved fresh capital for TPG’s seventh pan-regional vehicle.

3. Stapled transaction

How does it work

The GP seeks to address existing assets in some way – such as through a recapitalization or tender offer – but “staples” to the secondaries transaction a commitment to a new fund. The secondaries buyer must therefore also commit new primary capital to another vehicle often becoming the anchor investor in a new fund.

When does it work best

In theory a stapled secondaries process could either push along a fundraising process that is lacking momentum or, conversely, entice buyers into a secondaries process to push up the bid price.

What can go wrong

Stapled transactions are ridden with conflicts of interest that need to be managed as the process being run on one fund (with one set of investors) has a bearing on a new fund with a separate set of investors.

Example

In 2017, Lexington Partners purchased LP interests from investors in BC Partners’ ninth fund and provided fresh capital for the European buyout firm’s 10th vehicle, representing a combined investment and commitment of about $1 billion.

 

4. Whole or partial asset sale

How does it work

A secondaries firm buys a single asset or a piece of a single asset, which is usually of good quality. The asset is then transferred to a continuation vehicle where it is granted more time and more money and can continue to grow with the hope of a higher future return. Similar to a fund restructuring, the GP typically keeps managing the asset. LPs have the option to cash out or roll into the new vehicle.

When does it work best

Single-asset deals are usually employed when one asset remaining in a fund has performed well but hasn’t yet reached its full potential. With greater prospect for value creation in sight, the GP may want to hold it for a longer period of time.

What can go wrong

If the asset is indeed of good quality fewer LPs might be willing to sell. Additionally, the pool of potential buyers might be smaller as these transactions can be highly concentrated and hence riskier for secondaries firms.

Example

In 2018, TDR Capital transferred British pub chain Stonegate Pubs, an asset remaining in TDR Capital II, to a continuation vehicle backed by Landmark Partners and Goldman Sachs Asset Management.

 

5. Preferred equity

How does it work

Preferred equity presents an alternative to, and sits between, debt and equity. GPs can raise capital in the form of preferred equity with more flexibility than with bank debt, since there’s no liability, term and covenants. It can also be more attractive than selling equity for GPs who want to retain control and ownership of the assets.

When does it work best

There are several uses for preferred equity. GPs can use preferred equity as top-up capital to fund additional investments in a fund, to send liquidity back to LPs, to refinance existing debt or simply to meet ongoing working capital requirements.

What can go wrong

Pref can become an expensive source of capital if the facility is not appropriately designed to match the timing of the portfolio cash flows.

Example

In 2017, Landmark Partners financed Clearlake Capital’s purchase of Reservoir Capital’s stake in Clearlake’s GP management company. Reservoir had seeded Clearlake’s $180 million debut fund in 2006.