This presents a very complex picture of intertwined leverage lines that have not been tested in a market downturn scenario. A secondaries fund acquiring an LP interest in that buy-out fund may also use transaction-specific leverage, and all of this may be topped off by a capital call facility at the level of the secondaries fund. ![]() ![]() For example, a portfolio company may be owned by a buy-out fund using leverage and that buy-out fund may utilise a capital call facility. Availability of cheap leverage: In some of the most complex secondary transactions, there can be four, five or even more layers of leverage.This article identifies a number of factors the authors have observed that, in turn, may cause greater regulatory scrutiny of GP-led secondary transactions if the risks posed by these factors are not properly managed. These aspects bring a new level of complexity that requires specialist skills to navigate. These complicated transactions also require careful consideration of tax issues, as restructurings of portfolio investments or of the funds themselves often involve vehicles – whether the fund vehicle itself or a special purpose vehicle utilised for investment – that were designed to minimise the tax of a certain class of investors but which could create adverse tax issues for a secondaries purchaser with a different tax status. Current secondary transactions often involve GP-led: fund restructurings re-caps single asset deals “stapled” transactions3 preferred equity transactions and restructurings of groups of funds or combining groups of assets in a more cohesive way in order to boost returns. Long gone are the days when secondary deals involved only plain vanilla LP-led sales of LP interests. Historically centred around private equity, secondary transactions are now also seen involving real estate, infrastructure and credit funds. The secondary market is essentially a source of innovation in terms of allowing sponsors and investors to more effectively manage liquidity in what is otherwise an illiquid asset class. This article draws together a number of trends and developments, and highlights factors that could bring GPs into the crosshairs of regulators reviewing a GP-led secondary deal. This poses opportunities as well as risks for sponsors and their investors, particularly in the current macro-economic environment and regulatory landscape. Not only has there been growth in the number and size of GP-led secondary transactions, but there has been exponential growth in the complexity of such transactions. This represents a 71% increase as compared to 2017. GP-led transactions comprised 32% of all secondary transactions during 2018, accounting for approximately $24bn in deal value. ![]() The most striking feature of this growth is the general partner (GP)-led secondary transaction. The secondary market has experienced rapid growth over the past decade, and that growth has been particularly fast in the last five years.
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