GP-led actors likely to seek SEC rule exemptions

Certain types of deal may not require a fairness opinion, a case likely to be made to the regulator during the ongoing consultation period.

Secondaries market participants are likely to question the scope of new proposals governing GP-led secondaries deals, said one senior valuations professional.

As part of the US Securities and Exchange Commission’s regulations undergoing consultation, sponsors will be required to obtain a fairness opinion to ensure the price on GP-led deals falls within a “range of reasonableness”.

The “requirement for always” could be challenged, said David Larsen, a managing director in the alternative asset advisory practice at Kroll. “There may be good and valid reasons not to have a fairness opinion.”

These include situations where there is no new capital and all LPs agree to roll into a new vehicle, or where the net asset value of the fund is low enough that paying for an opinion will seriously affect the value of the assets. An exception may also be sought in situations where a single LP instigates a process in order to exit the fund, he said.

Under the proposals, the sponsor will also have to distribute to investors “a summary of any material business relationships” that it had with the fairness opinion provider in the past two years. These include matters related to audit, consulting, capital raising and investment banking.

This could work in favour of larger groups that offer multiple services including valuations, said Larsen, as the roles of specific individuals in the organisation are less likely to overlap, reducing the risk of conflict.

While valuations specialists have fewer, more simple relationships with GPs, being able to tap other departments ultimately leads to better valuations, said TJ Hope, a managing director in the valuation advisory group at investment bank Stout.

“[The investment banking team] is getting real-time intelligence on the market and on deals in that particular sector or industry,” he said. “That can be valuable to a valuation and opinion process. I hope the intent is not to drive away business from advisers that have more business lines, but just to provide more information to investors.”

GPs and LPs will need to negotiate whether the fairness opinion is a fund or manager expense. In the view of Chris Janssen, global head of the opinions practice at Kroll, a large majority of GP-led deals already follow the SEC blueprint, minimising the impact of the proposals.

“Seeking an independent and objective fairness opinion has become standard practice in GP-led secondary transactions, in the same manner as public company M&A deals since the 1980s,” he said.

The consultation period ends in mid-April.