We invited three secondaries lawyers to our London offices to discuss stapled deals. Partners Kate Simpson of Proskauer, John Rife of Debevoise & Plimpton and Saloni Joshi of MJ Hudson gave their views. The podcast will be available to download next week. In the meantime, here’s a preview:
Secondaries buyers driving best practice
When the Securities and Exchange Commission announced in 2015 that it was looking into conflicts of interest around stapled deals, it led to a drop-off in deal volumes and created suspicion among some LPs that stapled deals were designed to put them at a disadvantage.
According to the panel, the interest of the US regulator has spurred reform and the secondaries market today is much more careful to structure deals in ways that can’t be considered coercive. In the view of John Rife, the main pushers of reform were not LPs or GPs but secondaries buyers, which don’t want to dedicate time and resource to deals that might contain hidden gremlins.
“We keep talking about execution risk,” he said. “The only thing worse than a deal falling over before it’s been done is the risk of it falling apart after it’s been done.”
Fairness opinions increasingly driven by the LPAC
The use of fairness opinions on stapled deals is on the rise and is being driven by an unlikely source.
Historically, it was GPs who sought a third-party view, aware of the inherent conflicts that stapled deals can bring. Increasingly it’s the LPAC making such requests, particularly in Europe. The main reason for this is the concern that other LPs in a fund are looking to the LPAC to rubber stamp GP-led transactions, which they have neither the mandate nor the desire to do.
“Most LPACs hate it when they’re asked to ‘approve’ a transaction, because that’s not what they’re doing,” Simpson said. “What they’re actually doing is waiving the conflict in connection with the transaction in accordance with the partnership agreement. If you use those words, they tend to be much happier, because approval is not what they’re giving.”
Still some pushback from GPs on fairness opinions
Although the involvement of LPs is paramount, GPs still have to balance LPs’ needs with the need to get a deal done.
Joshi said that when representing investors, she will often ask for the right to refer to an independent price appraiser if her client doesn’t agree with the price being put forward – a request that sometimes gets pushback from GPs.
Given the expense of getting third-party opinions, it’s important that the GP knows the parameters of any third-party valuation process and that the valuation agent is the right one for the type of assets in question.
As Simpson put it: “It’s about being sure that if you get a fairness opinion [as an investor], you don’t say ‘I don’t like that one, I want another’.”
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