Freeing up GPs to free up liquidity for small investors

The severe market volatility earlier this year put intense strain on investor liquidity, especially individual and small-to-medium-sized institutional investors – as well as on CFOs, who had to manage unparalleled uncertainty with increased investor requests.

The Beneficient Company, a Dallas-based firm that provides liquidity solutions for investors in alternative assets, is pushing to make the case to private funds CFOs that it can help to manage such liquidity requests, reducing the operation friction involved with having smaller investors, especially in times when such demands come in waves.

“General partners, specifically chief financial officers, do not like to see their limited partnership interests change hands in liquidity transactions at discounts to net asset value,” said Brad Heppner, chairman and chief executive of Beneficient.

“We really tried hard at Beneficient to develop the product that we heard back from CFOs across private equity funds that their investors were looking for – that being monthly cash distributions and a set maturity date, where they exchange out at [or near] 100 percent of NAV.”

To that end, the service provider launched its Liquidity Bond 2020 in August, a bond that serves as an alternative to the secondaries market, partly in response to investor liquidity demands amid the widespread market uncertainty that came with the spread of covid-19 earlier this year.

Liquidity Bond 2020 is a four-year instrument comprised of the secured debt of publicly-traded affiliate GWG Holdings, which comes with an option to exchange for GWGH common stock after six months. Investors can exchange their fund interests for the bond, which aims to produce 6 percent interest, paid monthly in cash, at or near 100 percent of their NAV.

Heppner says the company is also working more closely with CFOs to advance its Ben AltAccess Platform, an online portal where alternatives investors can manage their liquidity. “We’re going to be advancing that hand in hand with general partners so that their funds can provide that access directly to their limited partners,” Heppner said.

“The chief financial officer will be given reports and will have online access to see who’s coming in and requesting liquidity, and be able to see the specific fund interest that would be exchanging out into the Liquidity Bond 2020 at [or near] NAV,” Heppner said.

Record-keeping

In addition to providing liquidity solutions, The Beneficient Company also provides capital account accounting for its clients’ underlying investments, a service that may prove essential following the introduction of 401(k) plans into PE.

“Our view on the marketplace is that there are three fundamental infrastructure hurdles that need to be addressed in order for that [401(k)] marketplace to operate efficiently. And the first is liquidity,” said Heppner. The other hurdles are the ability to handle the capital account accounting down to minute fractions of a dollar, and the disclosure and confidentiality of fund data, which the industry will have to work to get right.

Sister-title Private Equity International recently covered the difficult conundrum record-keepers of 401(k) plans, who track the individual allocated assets on each plan, would face in dealing with illiquid investments like private equity.

“The need to do the appropriate capital account accounting and the need to be able to provide the permanent financial institution liquidity – we’re already there,” Heppner said.

“We’re in the process of perfecting that, so that we will be ready to go and be able to operate when the 401(k) and IRA markets do figure out how to efficiently make investments with [updated confidentiality and] disclosure requirements.”