The majority of LPs are taking a pragmatic approach when it comes to rolling or selling in continuation fund transactions. Three-quarters of respondents to Private ­Equity International’s LP Perspectives 2023 Study say their decision depends on the circumstances of each deal.

Meanwhile, 18 percent indicate they will likely look to sell their exposure in these transactions with 7 percent saying they are likely to roll.

The fact that most respondents’ decisions are case specific most likely reflects LPs’ cognisance of their fiduciary duties, which require investors to make decisions in the best interests of beneficiaries on a case-by-case basis, rather than placing in hard and fast rules, Isabel Dische, co-head of Ropes & Gray’s institutional investors team, tells PEI.

A significant majority of investors in transactions today are, on average, opting to sell, market participants say.

The decision whether to roll or sell is very asset specific, says Christopher Elson, a partner and member of Proskauer’s private funds group. There is also a third option being presented in some circumstances – a partial roll that takes some cash off the table while placing part into the new fund.

“You almost get the best of both worlds there,” Elson says, adding that it can balance the question of liquidity versus wanting to stay with great assets within a fund.

LPs have different return requirements, which will influence their choices. The price that’s being offered, and therefore what their return will be based on their initial investment, “may present an IRR that they simply cannot refuse, even if the transaction involves trophy assets that are expected to produce even greater returns in the future”, Proskauer partner Jordan Hurwitz says.

Mandated valuations

The overwhelming majority of investors think mandatory independent third-party valuations are necessary in GP-led secondaries processes, with 90 percent saying they want to see them.

Practice remains mixed on independent third-party valuations, Dische says, but the vast majority of transactions solicit indications of interest and effectively run an auction process where a secondaries buyer ultimately prevails as lead buyer.


LPs that think mandatory independent third-party valuations are necessary in GP-led secondaries processes

“That’s a market-tested price and that’s an independent price even if you may not have the involvement of a bank… providing a fairness opinion on that deal… the process itself has validated the price in an independent manner,” she explains.

There are some “hairier” deals out there where there isn’t necessarily a third party setting the price, and it is these deals which Dische believes LPs are reacting most adversely to. However, such deals have “not been the norm whether in 2020, 2021, 2022 or I expect this year, and I don’t see that element changing”, she says.

Third-party valuations are certainly expected, and Proskauer has sometimes seen certain LPs push for specific provisions to be included in primary fund limited partnership agreements. These would set out the steps that must be followed on any future GP-led transaction, such as obtaining investor or limited partner advisory committee consent and a requirement to obtain a third-party valuation, Hurwitz says.

“If such provisions were to be enshrined in the LPA, this would actually serve as a contractual obligation on the GP to verify the price independently,” adds Hurwitz.

Independent third-party valuations could be enshrined in regulation. The US Securities and Exchange Commission has proposed new rules whereby managers will be required to obtain a fairness opinion to ensure the price on GP-led deals falls within a “range of reasonableness”.

“Irrespective of what’s common practice and what LPs expect, if the SEC’s recently proposed rules that would fall under the Investment Advisers Act of 1940 do end up being implemented, many GPs will be obligated to obtain an independent third-party fairness opinion as a matter of law and regulation in any event,” Hurwitz says.