‘GPs are becoming more creative’

The Drawdown (TDD): First off, your move. What drew you to Dechert?

Sam Kay (SK): There is an exciting opportunity with an established, strong team focusing on private capital here. While Dechert already has ambitious clients managing high profile funds, the firm is making a concerted push into private markets across the globe and it is thrilling to be part of that.

Simultaneously, my clients are becoming ever more creative when considering options for raising their next fund and are asking for complex solutions to match. It was important to me to find a firm that will support me in supporting them to the best of my ability.

TDD: What is driving your clients’ creativity?

SK: Given the current market conditions, there is an overarching need for liquidity and its management. The fundraising market has been tight. Although it’s not as bad as it was during the global financial crisis. I think in private equity especially, it is important to take a step back and look at where we are in an economic cycle with a long-term lens. But fundraising is tough nonetheless.

This pushes a need for sophisticated solutions. In order to raise a new fund, you cannot simply repeat the prior playbook or strategy. Currently, it is harder for GPs to complete exits of assets held within an existing fund. But LPs are still looking for realisations to have capital available to reinvest into the next vintage. So, for the GP it is becoming paramount to consider liquidity options when planning for the next fundraise. Here, innovation and creativity are key.

TDD: Can you walk us through an example of such a creative solution?

SK: The most obvious example is the use of GP-led secondaries and continuation vehicles. If capital is tied up for a long period of time, then LPs find it harder to invest into the next fund. For GPs, they also need to show a strong track record of returning capital. Another reason is both GPs and LPs wanting continued exposure to high-performing assets.

Continuation vehicles are particularly interesting because they demonstrate an increasing focus from GPs on providing solutions to their LPs. Some 10 years ago, in general the relationship between LPs and GPs was more passive.

Investors committed to a fund, the GP used the capital to make investments, the GP disposed of the investments at some point in the cycle and returned cash to investors, and the investors were then able to commit to a successor fund.

What GPs are doing now is far more innovative, far more interesting. They are working hand in hand with their LPs. Some LPs want capital returned, some want continued exposure. The continuation vehicle provides the solution to a broad range of investors and their individual needs.

Obviously, there are challenges. GP-led secondaries and continuation vehicles raise questions around conflicts of interest and how the assets are being valued. The structuring of the transactions is also pretty complex. But they show that GPs are providing answers and creative solutions to their investor base.

TDD: You mentioned the GP-LP relationship being more active, how do you see this developing further?

SK: It’s collaborative. You see more of a dialogue, more reporting, more flow of information. Over the years there’s been a push from LPs asking for transparency and good quality reporting. We see that happening now.

I think LPs will continue to support the GPs they know and have built a rapport with. However, at the same time, they’re more selective about which GPs they are supporting. There’s a constraining influence on the market, where LPs can be a bit more demanding on LP-friendly terms.

The shift isn’t huge but I think over the next few years it will be harder for first-time GPs to raise capital as LPs will focus on the relationships they have. It’s a flight to quality and what you know, and I think for a while they’ll be committing to the next iteration or vintage rather than the debut fund of an emerging manager.

TDD: You mention it will be harder for new players to establish themselves in the market – where do you see this going?

SK: There is a clear connection between consolidation in the market and succession planning. Private equity’s long-term perspective means that committing to the next fundraising cycle requires staying in the game for another decade or so.

As a result, some individuals or teams are considering whether now is the right time to realise some of the value they have built up throughout their time at the firm. But it is hard to do so without a strategic partner coming in and taking a stake in the business. You also have large asset management platforms that want increased exposure to private equity, further driving the trend in stake sales.

By its nature, it will always be a small part of the market. But to my mind, it is an indication of the maturity and sophistication of the private capital industry.

TDD: Looking at the immediate future, how do you expect to spend your first year at Dechert?

SK: My practice fits perfectly into Dechert’s global strategy and its strong asset management and financial institution client base. So, the immediate future will involve a lot of orientation, particularly with the firm’s current client base, to understand how I can support existing clients who may be looking at private equity-style opportunities.

Dechert’s platform also allows me to engage teams in multiple offices and practice groups across the globe. So, for existing clients, I’ll be working with these teams to make sure we are providing a holistic approach to the fund structuring requirements.

Towards the end of the year and into 2024, I am expecting a significant amount of fundraising work as a result of the pent-up demand. I want to make sure we will be in the best possible position when that time comes.