“At a time when secondaries funds are increasingly striving to show how they’re differentiated, being able to prove you are a true deal lead is going to become more important than ever.”
That was Secondaries Investor‘s conclusion at the beginning of 2022 hot off the back of a record year for secondaries activity punctuated by significant GP-led volumes.
It has proved to be true. Many buyers have been or are still out raising capital at a time where wide bid ask spreads and market volatility has coloured the market. That has meant many are choosing to back what they believe are the highest quality transactions with alignment on price and interests, resulting in subdued deal activity compared with the lofty heights of 2021.
The coveted lead position, particularly with this backdrop, adds a silver lining to marketing documents designed to win over LP capital.
There continues to be instances where Secondaries Investor is told conflicting information on which parties were lead investors. We are also aware of situations where parties issue press releases that skirt the edges of misleading.
Beyond which firm structured and negotiated a deal, or which buyer committed the largest ticket to a transaction, there are some legal documents that will paint the complete picture of who is a lead buyer and who is not.
Although there is no “legal definition” of who is a lead investor, per se, the lead investor or investors are typically designated by name in contracts around the deal, Andrew Rearick, a partner at Fried Frank, tells Secondaries Investor.
Broadly, lead investors will have certain rights under the document that others won’t. Typically, there’s some protection of their allocation. For example, they will be allocated the amount of money in the deal that they want to commit and have rights to make decisions on behalf of the continuation vehicle, as part of the important conflict mitigation function that lead investors perform in these transactions.
There is a small technicality where confusion could arise. Sometimes the contract may allow the GP flexibility to designate other lead investors – in addition to those named in the contract. In these cases, a GP could designate a buyer coming in later to a deal as a lead investor – if they are speaking for a sizeable amount of capital, for example, Rearick adds.
Those in the weeds of the transaction who have access to legal documents could ask for retractions – something Secondaries Investor is aware of having happened – which could leave a buyer with egg on their face.
As more LPs seek to invest in secondaries and seek out firms known for setting price, terms and speaking for capital as a feature of their strategy, it is understandable that firms may want to inflate their participation in a transaction. A word of caution: if potential investors are being told by separate buyers that they were a lead or a sole lead on a transaction it’s inevitable that complications will ensue.