Insurance in Secondary Transactions
In recent years, a combination of factors has led to a steady rise in secondary transactions in the private equity (PE) market. Some of these factors include restricted access to debt financing and the slowdown in public markets, widening bid-ask spreads for M&A transactions, the desire for PE firms to hold their investments longer than previously envisioned, and broader macroeconomic volatility. A recent survey of mid-to-high net worth investors found that 82 percent sought liquidity from their funds1 in the past five years, whereas the term on most funds is ten years or more.
What is a secondary transaction?
In private equity terms, a secondary is the sale of an investor’s stake in a PE fund before it reaches its maturity. Secondary transactions primarily occur because initial investors are seeking liquidity, and new investors want access to the fund and its current investments. Secondaries can take place directly between investors (existing and new) or through a PE firm-sponsored transaction, typically referred to as a general partner (GP)-led secondary. A PE firm may consider undertaking a GP-led secondary when it wants to maintain its ownership of certain assets longer than the term of the fund, while at the same time providing a monetization opportunity for its existing investors. In a GP-led secondary, the fund’s initial investors may choose to divest their interests at an agreed-upon valuation, or they may elect to roll their interests from the existing fund into a new continuation vehicle (CV) that will own the contributed assets going forward.