Is GP Restructuring An Emerging Asset Class?

A decade ago saw one of the boom periods for private equity with $1T of funds raised between 2005 and 2008. Now that most funds raised during that time are approaching the end of their 10-year contractual life, there has been a surge in GP-led fund restructuring transactions that has many in the industry looking at the space as an emerging and attractive asset class for investment.

“The restructuring of a PE fund is driven by LPs seeking liquidity in these older vintage funds and the tension with GPs who require more time or more capital to realize future value in its portfolio companies”,” says ICG Director of Secondaries Christophe Browne, speaking to Privcap at Hycroft’s 2015 Private Equity Conference in Miami.

“The structure of private equity funds doesn’t always mirror the right time to sell assets and realize maximum value,” he says.

The financial crisis pushed out the holding period for almost all PE-owned companies, and now a growing number of assets are now managed by GPs who ended up “underwater” on the economic incentives, which has caused some misalignment of interests between GPs and LPs.

For Browne, this type of crisis presents an opportunity for his team of specialist secondary portfolio buyout experts.

“When you look at the 2005 to 2008 vintage of funds that are now reaching expiration but have not performed, the management fee becomes the only incentive for the GP and LPs don’t have liquidity options,” he says. “That’s the perfect opportunity for us to go in and offer LPs a comprehensive solution by partnering with the incumbent GP to buyout all of its remaining unsold assets with a rollover option into the newly restructured vehicle”.

But the process of restructuring a PE fund is complex and requires a unique set of multi-asset due diligence capabilities and multi-party negotiating skills in order to complete a transaction in a relatively short amount of time.

Last year, Browne, along with ICG’s Global Head of Secondaries Andrew Hawkins, executed a successful restructuring of the 2005 vintage Diamond Castle Partners IV fund with a new $860M investment vehicle acquiring the portfolio of eight remaining companies and managed by Diamond Castle’s GP team.

“Diamond Castle was a classic example of a restructuring transaction, which had the challenges of a complex process and multi-party negotiation,” says Browne. “The fund was nine years old and there had been changes in the leadership partner group at the GP. Yet, there was still over $700M of net asset value remaining in eight portfolio companies.”

Browne adds that ICG’s job was to negotiate a satisfactory deal that would be accepted by more than 75 LPs, along with a partnership agreement with the GP to align interests for a new holding period. At the same time, they had to perform asset-level due diligence on eight companies in a matter of 45 days and be out with a tender offer to LPs in 60 days, he says. “It’s always a herculean task to get the deal done, but it’s great when it all comes together with a good outcome for all parties.”