GP-led private equity transactions are broadly harmful to the interests of limited partners, according to a new report from London-based secondaries adviser PEFOX.
The research paper provides a critical examination of these new structures and considers the impact of fines by the SEC against GPs for abuses; complaints by multiple parties including law firms, consultants and some of the largest LPs in the world; and, a rise in LP activism to block GP-led deals. Highlighting examples where these transactions have drawn significant opposition from LPs, the advisor observes that “fatigue and concern are now commonplace reactions by many LPs to GP-led deals”.
Particularly critical of the fundraising component of GP-led deals, which the advisor says blurs the lines between the primary and secondaries markets, the report says: ‘What may land on the desk as a purported secondary transaction, may in fact be a fundraising brochure.’ Moreover, in an entirely new line, the advisor raises arguments which suggest LPs in GP-led processes, where new capital is raised, may have a claim to compensation from the GP.
The reports follows a string of warnings from LPs and industry bodies against GP-led deals which arguably began with the written intervention of Real Desrochers, the former managing investment director of Private Equity at CalPERS, to effectively block and terminate the restructuring of First Reserve XI. Most recently, the Institutional Limited Partners Association (ILPA) has stated its intent to issue formal guidance in order to respond to concerns amongst its members.
The full report is available on the PEFOX Library to Level 2 users. Commenting on it, Katja Salovaara, a Senior Private Equity Portfolio Manager for Ilmarinen, a mutual pension insurance company, said the paper was very much reflective of her own views and an important articulation of LP’s concerns, noting that many GP-led deals are ‘non-productive and misaligned’ with the interests of LPs.
