Importance Of Strong Middle And Back Office Critical For Successful PE GP-Led Strategies

Last month we saw the three-year anniversary of the majority of the stay-at-home orders that were designed to slow the spread of Covid-19 in the United States. 

As with most industries, the private equity one had to figure out quickly how to work from home. That wasn’t an easy task for a space where travel and face-to-face meetings were both commonplace and necessary. But they also had to figure out what to do with portfolio companies that were previously solid businesses but suffered from the contagion effects of lockdowns. 

One of the trends in the space that received a good deal of coverage at the time was the rise in the use of continuation funds by buyout firms so that they could hold onto their prized assets while they figured out how to navigate the ‘new normal’. 

It wasn’t a short-term trend; these GP-led secondary deals have become more of a feature of the broader private equity secondaries space in the past few years. While market activity declined 24% last year when compared to 2021, the GP-led side still had its second most active year on record. 

The reduction in activity should probably not come as a surprise, given the difficult macroeconomic environment of 2022 – most industries in the private markets sector observed a pullback in deal-making and fundraising last year. But what is an interesting trend is that the GP-led secondaries market has continued to hold its own in terms of the overall PE secondaries space at around half of the total. 

The sentence in Jefferies’ report that I thought stood out is, “The decision for sponsors considering a GP-led secondary has largely shifted from ‘if’ to ‘when’ (page 7). Blackstone seems to agree, with the firm announcing its debut GP-led continuation fund product, Strategic Partners GP Solutions, this past January. 

It’ll be interesting to see how many other firms follow suit to launch more specific vehicles in the private equity secondary market. Some say that further segmentation is inevitable, which seems to make sense. But doing so will require much more administration and middle- and back-office support. For the larger firms, that’s no problem – they are already very well-resourced. But for smaller firms and many mid-sized ones, that’s an added cost consideration, especially as management fees seem to be falling.

Those private equity firms that have a robust middle and back-office support infrastructure, that enables them to focus on the job of managing not only multiple portfolio companies but multiple investor vehicles, will be best placed to succeed in the ever-evolving world of private equity secondaries. 

**The above reflects the personal opinions of the author and is not to be considered investment or legal advice or advice of any kind.

Greg Poapst, “Importance Of Strong Middle And Back Office Critical For Successful PE GP-Led Strategies” (Essential Fund Services International, April 2023)

https://www.essentialfsi.com/importance-of-strong-middle-and-back-office-critical-for-successful-pe-gp-led-strategies/