In addition to setting a price through either a competitive auction process or the sale of a minority stake, it is increasingly becoming standard to engage third parties to conduct an independent valuation or fairness opinion.
“In many transactions, the broad array of bids received for the assets from potential secondary buyers provides sufficient assurance that a market price has been achieved,” says HarbourVest managing director Valérie Handal. “In some more complex [deals], a valuation report and fairness opinion from a third-party provider may be useful for LPs.”
Rob Campbell, head of North America for ICG Strategic Equity, adds that the decision tends to be made on a case-by-case basis and that selling LPs typically do well out of these deals. “As single-asset transactions are frequently centred around a GP’s high-performing assets, selling LPs typically crystallise a highly attractive return, often in excess of three times.”
Ultimately, the decision as to whether to engage an external adviser, often a bank, to conduct an independent valuation and fairness opinion currently lies with the limited partner advisory committee.
“The LPAC has to approve these transactions so it will depend on whether an independent valuation and fairness opinion is deemed necessary, or if the LPAC considers a competitive bidding process to be a better indication of true value,” says Cari Lodge, a managing director and head of secondaries at CF Private Equity.
Help or hindrance
However, regulatory rumblings in the US suggest this may not always be the case, and opinion is divided as to whether this would be a good thing. “In the US, the SEC is making it a requirement that a fairness opinion is sought, but I would say that LPs and GPs typically do not materially value them, because while they provide verification, they are not really seen as adding all that much. The process of price discovery is seen as more important,” says Immanuel Rubin, a partner and head of European secondaries at Campbell Lutyens.
Joseph Marks, a senior managing director and head of secondaries at Capital Dynamics, believes the proposed SEC rules would be a positive development. “I think it gives protection to the manager as much as the buyer, and we are starting to see fairness opinions included as part of most of the deals we see today,” he says. “That brings additional transparency to the process and supports LPs in making their decisions.”
“These rules are in comment period, they are not finalised,” adds Pantheon’s global head of private equity secondaries, Amyn Hassanally. “But a number of transactions already include a fairness opinion so the SEC is simply looking to standardise something that already exists in the market today while giving LPs comfort that there will always be a third-party validation that the price being offered is fair. If approved, LPs will have two forms of third-party validation in order to make an informed choice as to whether to roll or sell.”