The most notable impact of the US Securities and Exchange Commission’s proposed reforms for GP-led secondaries is a requirement for the GP to obtain a fairness opinion from an independent provider and share it with interested parties.
“In our view, this is ultimately a healthy development for the GP-led market,” says Rob Campbell, head of North America for ICG Strategic Equity. “With so many constituents involved, these transactions have always been rife with potential conflicts of interest. An independent valuation and fairness opinion is prudent from both a legal and business standpoint, as all stakeholders are comfortable that the transaction is fair to them from a financial point of view.
“Encouragingly, the SEC’s proposal acknowledges the benefits associated with GP-led transactions, namely how they provide a mechanism for investors to receive liquidity and also provide additional capital and/or time to maximize the value of the fund’s assets.”
Meanwhile, Valérie Handal, a managing director at HarbourVest, does not believe that the new requirements – which also include obligations to report transactions to the SEC – should represent a material burden for sizable, high-quality GPs with well-established compliance teams.
“As such, we wouldn’t expect a meaningful change in activity for deals involving GPs of this type,” she says. “Overall, we expect GP-led activity to remain robust, as these deals, when properly constructed, can represent a win-win-win solution for all parties involved. GPs can extend their ownership of trophy assets; existing investors have the option to receive liquidity or to maintain their exposure; and secondary investors can access great assets, managed by high-quality GPs, that wouldn’t have historically traded on the secondary market.”
Nothing to fear
Debevoise & Plimpton partner Marc Ponchione, however, says that if the rules are finalized, as anticipated this spring, the provisions applicable to secondaries are largely unnecessary. “Many secondaries deals already require fairness opinions or contain features that mitigate the risks the proposed rule seeks to address and make a fairness opinion redundant,” Ponchione explains. “For example, many deals require LPAC consent on the sellside, and experience generally shows that a significant majority of investors elect to receive cash when given the option to cash out or roll forward, which is indicative that investors view the price offered as fair.”
More fundamental is the fact that many aspects of the proposed rule – including the new requirements for secondaries – involve the SEC imposing a requirement in a purely commercial situation that is better handled between sophisticated private parties, Ponchione adds. “In the context of secondary transactions, those parties may ultimately conclude that the expense of a fairness opinion isn’t necessary and outweighs its value. To take this decision out of the hands of consenting institutional parties smacks of over-reaching.”