The ultimate cost of a GP-led secondaries process largely depends on the transaction’s size and complexity. “Principal costs include those associated with third-party advisers and legal due diligence, and structuring, and are contingent on the transaction’s successful closing,” says Christiaan van der Kam, head of secondaries at Schroders Capital.
Sophie Smith, a counsel at Cleary Gottlieb, adds that the financial adviser costs will typically be split into a transaction fee, which will either be a flat fee or a percentage of the transaction value, and a placement agent fee. “How the fees are borne is often deal-dependent, but with respect to the transaction fee, this is generally borne either by the selling fund as a whole or by the LPs who elect to cash out as part of sell-side expenses. Such costs will not typically be borne by the continuation vehicle.”
The question of whether these costs are borne by all LPs in the selling fund or just those cashing out will depend on the flexibility to charge fees on a non-pro-rata basis, as prescribed in the LPA, explains Debevoise & Plimpton partner John Rife. “It also depends on the motivation behind the deal. If the transaction is being driven by LPs requiring liquidity, it makes sense that the costs are borne by those LPs. But if the transaction is being driven by sponsor or whole fund considerations, the situation may be different.”
The placement fee, meanwhile, is usually borne by the continuation vehicle and in that case, there will likely be a dollar-for-dollar offset against the management fee payable by the continuation vehicle LPs or by the portfolio. “In addition, the establishment costs of the continuation vehicle will typically be borne by the continuation vehicle itself, often subject to a cap, whereas the cost of negotiating the transaction documents will often be split equally between the liquidating LPs and the continuation vehicle,” Smith explains.
“Allocation of expenses between the selling fund and the continuation vehicle is a heavily-negotiated point between sponsors and lead investors and is ripe for scrutiny by regulators, particularly in light of the recent SEC [US Securities and Exchange Commission] proposals,” Smith adds.
Of course, not all GP-led deals are structured in the same way, which can have a significant impact on the overall cost. “There is a huge difference between the cost of selling a strip portfolio to a new vehicle and a tender offer where all that is happening is that a secondary buyer is acquiring an LP’s stake in a fund,” says Rife.
“Continuation vehicles can also be structured in very different ways,” Rife adds. “You can have an all-cash transaction where the rollover option isn’t really a rollover – it’s a reinvestment option, although there doesn’t have to be actual cash movement. But you also see more structured approaches where one of the objectives is to avoid a taxable event for the LP. In that scenario, it is more complicated. There is a contribution in kind and then a distribution in kind, together with a subscription and redemption process. That is obviously a more expensive option.”