Five reasons to consider a GP-led secondary

Viewpoints
June 28, 2023
2 minutes

GP-led secondary transactions, generally speaking, involve one sponsor-advised fund selling a basket of portfolio companies to a newly-formed continuation vehicle, or a “CV,” with a new set of investors. Investors in the existing fund have an opportunity to be cashed out of their share of the portfolio companies using the proceeds contributed to the CV; alternatively, these investors can roll their investment into the CV.

The market for GP-led secondary transactions has grown dramatically over the last few years.  As an example, a March 2023 presentation by a leading investment bank that is active in this space noted total GP-led secondary volume reached $68 billion in 2021, up from $7 billion six years earlier.  Although it was noted that market dipped to $52 billion in 2022, the bank projected $60 billion or more for the current year.

Institutional investors – including certain fund sponsors who until recently had focused on managing buyout funds, real estate funds, and growth equity funds – have entered the market as buyers in these deals.  We have also seen fund sponsors previously unfamiliar with these deals entering the market as sponsors transferring assets to CVs.  Those sponsors run the spectrum from relatively smaller sponsors with one fund to several billion dollar-sponsors with several funds under their belt.

We recently discussed, in this podcast, why sponsors may want to conduct GP-led secondary deals. Five common reasons include:

  • Allowing for a longer runway but without the limitations associated with transferring to a successor blind pool fund in a cross-fund sale;
  • An opportunity to bring in new dry powder to fund follow-on investments in the portfolio companies at issue;
  • An opportunity for the sponsor and investors to lock in gains – for the sponsor, it’s an opportunity to crystallize carried interest; for investors, it’s an opportunity to realize early profits on the portfolio companies;
  • Giving investors an opportunity to calibrate their liquidity profile and exposure to different asset classes; and
  • Allowing for continued alignment of incentives for the sponsor as the sponsor’s personnel evolves, by providing full liquidity to former personnel and providing carry to new personnel involved in the portfolio company.

Reasons can vary, but it’s important for the sponsor to have identifiable justifications for undertaking a GP-led secondary.  Investor scrutiny – including upcoming guidance from ILPA – and regulatory scrutiny require that the sponsor can speak to specific reasons for undertaking a GP-led secondary when more conventional dispositions seemingly otherwise would suffice.

To listen to the full podcast, please click here.