Stapled Secondary Transactions
Many General Partners coming to market to raise their next Fund, have to deal with the issue of LP's from previous funds that are no longer able to invest in the upcoming Fund, even though manager performance may have been in line with industry benchmarks. These reasons may include:
- The LP is over-allocated to the asset class
- The LP is interested in cutting back GP relationships
- The LP is no longer investing in private equity
This prior fund LP's capacity is thus no longer available for "re-ups" and causes GP's to raise a higher proportion of their upcoming Fund from new LP, which requires a more challenging fundraising effort.
To help solve this problem, under certain market conditions, Azla can offer select GP's with strong track records and strong portfolios (in a variety of asset classes), who are raising a new Fund which requires new LP relationships, a Stapled Secondary Transaction Service thereby lowering the barrier to bringing in new LP's to the Primary Fund. This is accomplished by linking or "stapling" investor participation in a secondary market transaction arranged by Azla Advisors with Dormant LP's willing to divest (LP's who will no longer be participating in future Funds) to participation in the GP's next Primary Fund. This enables the GP to build a new LP relationship more efficiently by leveraging the secondary transaction component, which may have a shorter time and diligence threshold.
Azla's Stapled Secondary Transaction Process
We have developed a Stapled Secondary Transaction process that works as a three-way partnership between the GP, the Dormant LP who might be interested in divesting all or a portion of their commitments in previous funds, and Azla Advisors, as follows.
- The GP who is raising a new Fund and has a current strong portfolio contacts Azla Advisors.
- Azla determines if current portfolio underlying assets will be attractive to secondary buyers
- Azla Advisors and the GP analyze the current LP participants likelihood of re-upping and identify LP's that will most likely not re-up and could be candidates to divest all or part of their LP Interests in previous Funds.
- The GP then introduces the Dormant LP's to Azla Advisors and facilitates an engagement relationship between the Dormant LP's and Azla.
- Azla then works with the Dormant LP to identify potential buyers of their secondary position who are also candidate primary investors in the GP.
- Azla always fully discloses the Stapled nature of the prospective Secondary Transaction in its marketing materials and initial contact with the Prospective Secondary Buyers/Primary Investors.
- Azla then facilitates the Transaction Execution Process with the Prospective Secondary Buyers on behalf of the Dormant LP.
- After closing the Secondary Transaction Azla then has an option to represent the GP as a Primary Placement Advisor in facilitating the Stapled Primary Fund Investment and further fundraising
Azla's Secondary Transaction Process benefits both the GP who wants to facilitate the development of new LP relationships, the Dormant LP who is interested in lightening exposure in the asset class or paring down GP relationships, and the joint Secondary Buyer/Primary (Staple) Investor who is seeking to deploy capital in high quality GP's.