When it comes to regulation, the secondaries industry has gone from “zero to not a very high bar”, as one lawyer put it earlier this year. This week, the US regulator elevated that bar a notch higher.

To recap, the US Securities and Exchange Commission on Wednesday gave final approval to private fund advisers rules under the Investment Advisers Act of 1940 marking the most consequential change in recent years, reshaping how the private equity industry operates.

The secondaries market was not spared the regulatory spotlight. GPs either based in the US or with US investors must obtain a fairness opinion or a valuation opinion from a third party in continuation fund transactions.

Importantly, tender offers were removed from the final proposals voted on this week, having previously been included as they come under the banner of an “adviser-led secondaries deal” (to use the SEC’s parlance). “That would have been too much overreach,” a senior advisory professional told Secondaries Investor after the vote, referring to the SEC’s initial proposals to include tender offer deals.

Some commentators have made the point this week that giving fund sponsors the choice between mandatory valuation opinions or mandatory fairness opinions is something of a significant departure from the regulator’s initial proposals. For anyone unclear about the difference: the former involves a fairly standard assessment of whether assets involved in a potential continuation fund transaction have been marked at fair value, whereas the latter involves more of a 360 degree take on whether the proposed transaction has been market tested and is a fair offering to selling LPs.

While the SEC has indeed conceded to give GPs the choice between the two, fairness opinions are far more standard market practice compared with valuation opinions in any event, according to Milko Pavlov, a managing director at Houlihan Lokey who works on financial and valuations advisory, who added that all his firm’s activity in that regard has been devoted to fairness opinions in recent years.

Choice aside, it was already increasingly standard practice to engage third parties to conduct an independent opinion analysis. Market sources tell Secondaries Investor that most continuation funds involving US GPs already involve fairness opinions. Where the SEC’s new rules are likely to have an effect is in Europe, where roughly half of deals won’t have third-party opinions, we’re told anecdotally.

While some have expressed the view that valuation and fairness opinions do not add much value to transactions versus the costs incurred to get them – which, let’s not forget, are borne by all or some of the selling fund’s LPs – the practice now becoming mandatory should ease concern from investors that may have felt short changed.

Speaking to affiliate title Private Equity International last year, Swedish insurer Skandia Asset Management’s head of private equity and infrastructure Daniel Winther said that if GP-led transactions are “properly done so that it really is about riding that winner [for] four or five more years, then I’m in favour of that”. The caveat, however, was that he had “seen situations where the price is obviously not fair, where they could have sold an asset for a higher price, but they decided to roll into a continuation fund at a lower price”, noting that Skandia has mostly sold in continuation fund processes.

In our view, the secondaries market was organically moving towards valuation and fairness opinions becoming market practice more globally. The US regulator has simply sped up that process. Still, compared with many other segments of financial markets, the secondaries market has come off lightly in these latest regulations.

Write to the author: madeleine.f@pei.group

– Adam Le contributed to this report.