Cork Gully takes the lead on Managed Exits

Rather than selling troubled positions at heavy discounts in the secondaries market, LPs should consider bringing in outside support to agitate for a successful wind-down, says Cork Gully managing partner Stephen Cork.

What is a managed exit and when does it make sense for an LP?

Traditionally, when people talk about a managed exit, they are talking about a secondaries sale, a fund wind-down, a recapitalisation or some other pre-agreed liquidity option. We provide representation for LPs in challeng­ing and complex situations, including distressed and turnaround scenarios, whereby the LP effectively outsources the management of their exit to us.

The circumstances vary, but it may include significantly underperforming positions or situations where there is a misalignment of expectations between the LP and the GP. This might occur when there may be concerns about the performance of the GP, interest from secondaries buyers may be limited and, if there is interest, it may be difficult for the LP to sell at the level of discount being offered.

Equally, the LP may not have the in-house skills and experience to man­age complex and challenging workout situations. Cork Gully has been advis­ing on turnarounds, restructurings and liquidations since 1906, and we are able to step in and represent LP’s interests by agitating and co-ordinating negoti­ations with the GP and other LPs to facilitate an effective exit.

This can involve putting the GP un­der pressure to improve performance, engaging with co-LPs – potentially through a role on the LPAC – or advis­ing on GP-led secondaries. Although infrequent, we can also support LPs by replacing the GP and taking on the management of the fund. Whatever the preferred strategy and course of action, the focus is ultimately on preserving value for investors, and data shows that managed exits can result in a 74 per­cent increase in returns over what may otherwise be possible through a sale in the secondaries market.

Do you expect to see more managed exit scenarios emerging going forward?

We believe so, not least because of the dramatic increase in the number and size of funds that have come to mar­ket over the past 10 years. As of 2024, private capital markets have reached around $14.5 trillion in assets under management, up from around $10 tril­lion five years ago, according to a re­port from Bain & Co. The age of many private equity funds has also risen, driv­en by recent market conditions, from typically around 10 years to, in many cases, a range of 12-15 years, or even longer to the frustration of many LPs.

These LPs may be facing challenges when rebalancing their portfolios, gen­erating liquidity and they may also have concerns around the valuations that the underlying assets are being held at. There could also be regulatory issues involved. We’ve also seen a signifi­cant increase in the number of assets going into continuation vehicles. LPs are often anxious to ensure that their interests remain aligned with GPs in those situations. These are all scenarios where an LP may benefit from outside support.

I would add that there has also been a sea change in terms of LP perspec­tive. They are less likely to be passive if things aren’t going as planned. It is just that they don’t always have the requi­site skill sets available in-house – that’s where we can help.

To what extent are managed exits competing with secondaries sales?

We have already seen exponential growth in the secondaries market. Out­sourcing is an alternative solution as the secondaries market won’t suit every LP all the time. Involving a firm like Cork Gully to step in to put pressure on the GP and help the LP navigate the options could result in a far more successful secondary sale a year or so down the line.

Of course, that won’t always be the case. Sometimes an LP’s priority will be immediate liquidity. But we certain­ly see this as an emerging trend. In fact, we expect to see a threefold increase in managed exits over the next few years.

There has been a slowdown in IPOs and M&A activity and while there had been an increase in NAV lending, help­ing to drive liquidity, that has also be­gun to slow as it attracts increasing reg­ulatory attention and LP pushback. For a lot of LPs, a 30 percent-plus discount in the secondaries market just isn’t go­ing to be palatable, and a managed exit is therefore a compelling alternative to consider.

Are LPs concerned that taking an activist stance will impact their reputation among the wider GP community?

Again, I think that is one of the ad­vantages of having someone else act on your behalf. We are willing to take that hardnosed and objective-based ap­proach, but we are also able to put some distance between the LP and the diffi­cult situation that is being managed.

Managing different stakeholders is a core part of what we do as a special sit­uations business. For example, we may believe that a wind-down of the fund is the best option, but the GP may well push back. We can continue to agitate for that solution, ultimately resulting in better returns for the investor without them having to get directly involved. If needed we can act as manager, and even as liquidators thereby offering a com­plete end-of-life solution.

How would you describe competitive dynamics in the managed exit space?

There are a few firms with our skill set that turn around underperforming funds and offer the option of managing out the fund by replacing the GP or winding down the fund. We’re confi­dent in our ability to deliver real value and in this context, we are often pre­pared to consider performance-related fee structures which our clients find attractive.

After all, as an LP, why wouldn’t you consider this option? Yes, you can find someone to broker for you in the secondaries market and you can sell out for whatever you can get, but isn’t it worth pushing for a wind-down of the fund if that will ultimately offer you a better recovery of capital?

It is the same philosophy adopted by the banks, which leverage their work­out teams to drive value recovery rath­er than simply selling out or writing off bad debts. The challenge is that most LPs can’t justify having their own in-house teams to work on more troubled investments, whereas that is our core skill set.

It may well be that the LP has al­ready written off the investment, but there may still be outstanding obliga­tions on their part. Our ability to for­mally liquidate is just one element that sets us apart from the competition.