Volume of secondary sales is dramatically higher this year, compared to last year. $58 billion.
One of the key aspects that secondary purchasers like is avoidance of the blind pool. Usually, the fund is far along in allocating capital. To some extent, it avoids the J-curve problem. Secondaries are able to return capital back to their investors faster.
It has become less of an ad hoc investment strategy only targeting distressed positions. There has been a development for liquidity in the market and an investor demand for secondary positions, directly or trough investment funds. It has become an active strategy.
There has been an increase in GP-led transactions to lengthen a fund life or change the structure/strategy of the fund. As much as 20% of the transaction volume is GP-led. GP needs to be careful of the conflicts that come with the GP being involved in the sales transaction. If the GP is setting the pricing, there is a concern that the GP is underpaying the existing investors, or causing the new investors to overpay. Disclosure is very, very important.
There are two levels of diligence: the fund interest and the underlying investments. For a primary investment as part of fundraising, there is little or no portfolio to review. It’s all operational/GP diligence. Of course, the secondaries buyer wants the GP to consent to the deal. A GP may not want a secondaries purchaser who the GP considers to be a pain in the neck based on excruciating diligence.
GPs need to be cautious about injecting themselves into an LP trying to market an interest to avoid broker-dealer issues. However, the GP may know which LPs are interested in acquiring interests. In particular, the GP should avoid taking compensation in consideration of facilitating the transaction.
The GP buying the interest for itself may be considered a principal transaction requiring consent of the client (i.e. the fund).
(This session was subject to the Chatham House Rule so I have not identified the participants and have not attributed any of the statements to anyone.)
Hi Doug, I work with Jon Needell at Kairos Investment Management Company and we very much enjoy your blog. I love a blog that teaches me something while also making me laugh!
I did not attend the Private Fund Compliance Forum so I have been catching up through your notes. Thank you. I have a question in the post on Secondary Sales and I am hoping you will respond with clarification. In the 2nd to last paragraph, would you mind clarifying the last sentence: ” In particular, the GP should taking compensation to in consideration of facilitating the transaction.” Thanks so much! Sincerely, Sally Powell
A typo on my part. I originally left out the word “avoid”. The post above has been edited from my original raw notes for this correction.