GP-led transactions are inherently conflicted as the GP manages both the selling fund and the continuation vehicle that will acquire the assets. The onus is therefore on the GP to take steps, wherever possible, to mitigate these conflicts and manage them if they cannot be avoided.
“With respect to its original LPs, the GP should aim to run a transparent process with sufficient time and adequate disclosure to allow LPs to reach an informed decision on whether to sell into the transaction or roll into the continuation vehicle,” says HarbourVest managing director Valérie Handal. “Achieving fair pricing for LPs should be an overarching GP motivation and – where possible – an option to roll into the transaction presents a way to manage conflicts.”
Meanwhile, the new potential buyers seek to mitigate and overcome the conflict of interest with thorough due diligence and by negotiating terms around disclosure, accuracy and completeness of information, as well as GP economics and GP investment in the new vehicle, in order to ensure alignment of interest.
“Clearly the GP is on both sides of the trade and so the most important thing is that the GP isn’t setting the price,” says Immanuel Rubin, a partner and head of European secondaries at Campbell Lutyens. “Price discovery is the process that negates a lot of the inherent conflicts.”
“Clearly the GP is on both sides of the trade and so the most important thing is that the GP isn’t setting the price”
Rubin also points to other potential conflicts around timing and management terms. “We also sometimes see transactions between funds where there can be conflicts around price allocation and what each fund gets for the individual fund investment,” Rubin says.
“Above all, there needs to be a clear, strong rationale for the transaction that creates a ‘win-win-win’ for the existing investors, the new secondaries buyer, and the GP,” says ICG Strategic Equity’s head of North America, Rob Campbell. “The GP must demonstrate… that LPs have a strong understanding of the logic for any transaction from a financial and commercial standpoint.”