In February, the US Securities and Exchange Commission published its proposals for private funds, including provisions that affect the GP-led secondaries market. The proposals include single-asset secondaries deals, strip sales and multi-asset continuation vehicles, and state that sponsors would be required to obtain a fairness opinion to ensure that the price on GP-led deals falls within a “range of reasonableness.”
The proposals follow those by the SEC in January regarding the use of an enhanced Form PF, which include requiring GPs to file current reports within one business day of closing a GP-led deal.
Speaking to affiliate title Secondaries Investor the day after the latest proposals were published, Joncarlo Mark, who spent almost 12 years at the California Public Employees’ Retirement System with responsibility for investing its private equity portfolio, said regulations aimed at making GP-led processes more transparent for limited partners were a step in the right direction.
“The GP-led secondary is one of the most dramatic changes to private equity that we’ve had in years,” said Mark, who was chairman of the Institutional Limited Partners Association between 2007 and 2010 and is founder and part of the management team at adviser Upwelling Capital Group.
“If you just try to push something through and you’re not transparent, it will backfire on you, and it has backfired on several GPs that have tried to do that,” says Mark. “We’ve seen these things play out in some of the early [GP-led] deals, where you’d get word that the LP felt a little bit like they were being crammed. I think that is less the case today because GPs know the only way [a process is] going to get done is if [the GP is] transparent earlier on with more information about what is going on.
“If you’re going to do a deal, you need to make sure you’re being transparent to your LPs because you need them on board.”
For its part, the ILPA has welcomed the SEC’s moves. The body’s chief executive Steve Nelson said that the changes address issues of transparency, governance and the alignment of interest between fund sponsors and their investors – issues that the ILPA and its members had long prioritized.
In practice, many of the SEC’s proposals already exist in GP-led transactions, Mark said. “The key is the optionality that the LPs have. Every transaction that I see today is a situation where the LPs are given the option, ‘Do you want to cash out or do you want to roll forward into something new?’ If you’re offering transparency and you’re offering an option to take liquidity or move into the new vehicle, I think that makes sense.”
As for the SEC’s proposal that GP-led processes should be required to have independent third-party valuations, Mark said: “That adds cost and it may not even be effective.”
There is doubt within the SEC as to whether the proposed rules are the best way forward. Commissioner Hester Peirce, the lone dissenting vote against the amendments, called them a “sea change” and a “meaningful recast of the SEC’s mission.” The new rules would have a chilling effect on the market, she added, saying: “This proposal, if finalised, could hinder capital formation.”
The January and February proposals are undergoing a public comment phase of 30 days and 60 days, respectively.
Kyle Campbell contributed to this article.