The market dislocation caused by the coronavirus pandemic could lead to unique opportunities for GP-led secondaries, law firm Paul, Weiss, Rifkind, Wharton & Garrison has said.
Individual portfolio companies that need more time than expected to maximise value and distribute proceeds may now need an injection of capital, six lawyers from the firm wrote in a guest commentary on Tuesday.
The plain vanilla LP market could also experience an uptick in volume as investors seek liquidity, Paul Weiss noted.
“Accordingly, GPs should be prepared for an uptick in secondary activity, including as a result of investors’ defaults,” the firm wrote.
On Wednesday the World Health Organisation upgraded its assessment of the virus to pandemic – a disease that is spreading in multiple countries around the world at the same time.
The Paul Weiss lawyers outlined five areas of of a private equity firm’s operations that may need to be adjusted amid the outbreak, including fund documentation, valuation and banking relationships.
“The changing valuations of portfolio companies may impact the calculation of management fees, distribution waterfalls and clawbacks,” Paul Weiss noted. GPs may want to give particular attention to the valuation provisions in their fund documents to ensure compliance, and GPs are also encouraged to consider the potential impact on any subsequent closings in process, it added.
On Monday, law firm Debevoise & Plimpton warned that the coronavirus presents “significant challenges” for the secondaries market, as pricing of fund interests is based on historic pre-signing net asset values and because large, complex deals often have lags of several months between signing and closing.
“We can expect secondary buyers to explore creative means of price protection in purchase agreements, while secondary sellers may face difficult decisions around accepting price reductions, price uncertainty and/or transaction risk,” Debevoise wrote.
The pandemic’s impact is likely to have a significant impact on full year transaction volume, according to the managing director at a global investment bank that advises on secondaries deals.
“This will 100 percent slow down the market,” the managing director told Secondaries Investor. “The question is how much and for how long.”
The authors of the Paul Weiss guest commentary are Matthew Goldstein, Udi Grofman, Amran Hussein, Conrad van Loggerberg, Marco Masotti and Lindsey Wiersma.