Fund restructuring: The waiting game

That is the stop-start story of fund restructurings in Asia - a region that should deliver deal flow to secondaries investors, based on the imbalance between capital raised and capital returned. Whether GPs want to generate exits with a view to raising a new fund or are pushing into a restructuring by LPs who have become impatient at the lack of activity, Asia has potential. But anecdotal evidence is not crystallizing into success stories.

The US and Europe have indeed been active. According to respondents in Coller Capital's latest Global Private Equity Barometer survey, four in five LPs have received fund restructuring proposals since the onset of the global financial crisis. One in five has received more than five proposals. Nearly four in five have participated in one or more restructurings.

Notably, last November, Intermediate Capital Group and Goldman Sachs led a $860 million restructuring of US-based private equity firm Diamond Castle's 2006 vintage fourth fund. A number of existing investors achieved liquidity while the Diamond Castle team will continue to manage the assets.

One of the reasons such deals have yet to gain traction in Asia is because there is nothing on offer that compares to Diamond Castle. Restructurings are typically high risk, high return, which means investors want to deploy a reasonable amount of capital to make it worth their effort. Asia-based deals that have emerged are smaller than Diamond Castle and the GPs are less well known in the secondary buyer community.

Two India restructurings make for instructive examples. First, the acquisition of a legacy portfolio that accompanied the spin-out of the KPCB and Sherpalo Ventures India team (to form Lightbox) was clean but relatively small. Second, J.P. Morgan Asset Management's purchase of Canaan Partners' India portfolio, though a larger deal, came without a manager attached.

But in both these transactions, the LP base was small and motivated to sell. Restructurings usually involve three parties - the seller or multiple sellers; the GP, which is very involved in the process; and the buyers, typically secondaries funds - and it is difficult to secure an alignment of interest. Everyone must believe they have something to gain, or another opportunity they don't want to lose.

To be fair, there have been certain kinds of restructurings in Asia. For example, limited partnership agreements have been amended to allow for the exit of existing investors and their replacement by new backers, often accompanied by a stapled commitment to a new fund. As for more comprehensive deals such as tail-end restructurings, GP removals and portfolio carve-outs, there hasn't been much.

Price is an obvious stumbling block, particularly where many LPs are involved. It is difficult to get deals done without a significant and proactive investor or group of investors to drive proceedings.

There also needs to be willingness on the part of the GP. India and China saw fundraising peaks in the mid to late 2000s and these vehicles are approaching a tipping point: there is either sufficient liquidity to justify further fundraising; sufficient confidence in team and portfolio to give them more time, through an extension or a restructuring; or sufficient dissatisfaction with performance that action must be taken.

The pressure is material but not overwhelming. Industry participants say they see hints that managers are more open to secondary solutions. Other GPs continue to believe they can raise new funds while occupants of another category are resigned to their fate as "zombies," existing on a thinning stream of fee income. Their moment may come soon, but not yet.

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• Topics
• Secondaries
• Secondaries
• Restructuring
• Secondaries
• Asia