While the long-term consequences of COVID-19 remain to be seen, the immediate impact on the global economy is evident, impacting fund managers in a variety of ways – asset-level liquidity issues, delayed exits, etc. In our recent survey of 72 fund managers globally, distributions are expected to fall by ~35% over the next three quarters, relative to the preceding nine months. Similarly, fundraising in 2020 is expected to drop by 19% from 2019 record highs.
The secondary market has come a long way in the past decade. In the early days, it was used by LPs as a tool to rebalance their exposure, prune the number of GP relationships and free up liquidity. However, in the past few years, GPs have increasingly embraced the market; taking a more proactive role and using the secondary market as a tool to accelerate liquidity for their LPs, retain exposure to promising assets, restructure older funds, and even compliment their primary fundraising efforts. As a testament to the increasing popularity of the secondary market, 56% of the managers surveyed expect to tap the secondary market over the next nine months as an alternative source of financing and liquidity.
Outlined below are a number of popular GP-led financing and liquidity options. We recently completed a number of such transactions, post-COVID, and currently have a number of mandates across these various solutions.
For (older) funds that are fully invested and/or cannot recycle capital, additional capital can be raised in the form of structured equity or debt at the asset or fund level to play defense (bolster one or more portfolio assets), or offense (to execute on accretive, bolt-on acquisitions). Alternatively, this can be used to fund a distribution to LPs, and help GPs crystalise carried interest.
Financing solutions for GPs to launch or grow new platforms, buy out retiring partners/third party investors, or make an outsized commitment to their next fund. Depending on the GP’s preference, this could also be structured to have a finite tenor or as permanent capital. Besides financing, other benefits include expanding the GP’s investor base to include groups aligned with the GP’s investing style and strategic objectives.
Liquidity for LPs
Facing COVID-induced longer holding periods, GPs could choose to be proactive in providing their LPs with an option to get liquidity sooner – as a tender to all the LPs, or for specific LPs facing liquidity issues and unable to honor future capital calls. We recently completed an LP tender and coupled this with a primary commitment to the GP’s new fund, bringing them to their final close, which would have been otherwise delayed.
Besides simply providing LPs with a liquidity option, a number of other outcomes can be solved for, including restructuring an older fund to provide it with a longer runway to maximise value, and a reset on fees and carried interest to ensure alignment between the remaining LPs and the GP.
Secondary asset sales could be utilised as a pathway to de-risk assets that have run up in value and accelerate liquidity for LPs in more recent funds, or simply wrap up older funds. This could be in the form of a minority interest sale, an outright sale of a single asset, a strip of the portfolio, or the creation of a continuation vehicle where the LPs can choose to retain their exposure to a specific asset.
For GPs that have launched new funds, and deployed a meaningful amount of the fund’s target before the final close, Setter can introduce qualified institutional investors to commit to the fund and achieve a final close – particularly helpful for GPs in this tough fundraising environment.
While the above situations are not an exhaustive list of options, they constitute the most common situations we are seeing today. The breadth and depth of Setter’s global coverage of institutional investors, coupled with our extensive track record, puts us in a strong position to move quickly and discreetly in proposing and executing win-win outcomes.
About Setter Capital
Established in 2006, Setter Capital is a leading independent advisory firm specialising in providing liquidity solutions for fund managers and investors across the entire spectrum of alternative investments: venture, growth, buyout, real estate, credit, infrastructure, real assets and hedge funds. To date, Setter Capital has completed over $30 billion across over 400 transactions globally.
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If you have any questions, or wish to discuss any of the above, please do get in touch: