Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts leading to an often impenetrable wall of jargon for students and trainees. Next up in our Legal Lingo series, which we've introduced to help break down this jargon, is an explanation of what secondaries transactions are and why are they important for the industry.
Who are the typical stakeholders in secondaries transactions?
- The primary fund investors, commonly referred to as ‘Limited Partners’ (LPs). As outlined in a previous post, LPs may be pension funds or other sophisticated investors, like sovereign wealth funds. The capital provided by LPs is deployed by private equity houses to purchase companies from their original owners.
- The secondary fund investors, or ‘secondaries buyers’, an emerging type of private equity investor, who may be an institution or an individual, focused on purchasing stakes from LPs. The stakes purchased in secondaries transactions vary depending on the structure of the transaction and the objectives of both the buyer(s) and the seller(s).
- The target(s) being sold and purchased, which may be a stake in a limited partnership that owns an attractive asset, like a standalone private company, or several assets, such as a portfolio of companies in a high-growth sector.
What could secondaries transactions look like?
Secondaries transactions consist of private equity investors buying stakes in assets from other private equity investors.
- LP-led transactions: these are traditional secondaries transactions, where an LP sells its interest in a fund, which in turn owns stakes in a portfolio of companies, to a secondary investor who then takes up the position of the primary fund in the limited partnership.
- GP-led transactions: these are usually single-asset deals, where an LP sells one portfolio company to a secondary fund investor, allowing the primary investor to exit from its position in a particular asset to realign its portfolio with the fund’s investment strategy.
- Continuation fund transactions: these are transactions where an LP sells asset(s) to a ‘continuation vehicle’ owned by the same private equity fund. This may be done to enable a cash injection into the asset(s) sold or to extend the lifecycle of the asset(s) under the ownership of the fund. Continuation funds are also used to provide LPs with liquidity if an exit out of an underlying asset is undesirable at the relevant time.
Why are secondaries transactions important for the industry?
For investors, market conditions could translate into revised priorities and investment horizons. The secondaries market provides flexibility to private equity investors, enabling both buyers and sellers to manage risk across their portfolios and the opportunity to deploy or raise cash beyond the timescales of the traditional primary fund market model.
