June 17, 2022

RWI: General Partner-Led Private Equity Fund Secondaries

The past several years have seen significant growth in general partner-led secondary transactions which enable a sponsor to effectively extend the duration of an existing private equity fund.  In these transactions, a private equity fund’s general partner establishes a continuation fund into which it transfers certain of the original fund’s assets. Existing LPs are provided the opportunity to roll their interests into the continuation fund or cash out, and new investors are offered interests in the fund.

In the past, RWI has been used on a limited basis in these secondary transactions, but this Willis Towers Watson article says that’s changing, and that the use of RWI in these deals has grown dramatically.  This excerpt discusses how the traditional underwriting process adapts to general partner led secondaries:

RWI carriers increasingly recognize that, though secondaries LP investors’ scope of due diligence is limited, it supports the “fundamental plus” and knowledge-qualified representations provided by a continuation asset in standard GP-led secondary transactions. The typical diligence scope for a secondary investor consists of reviewing:

– Ownership and capitalization tables of the fund
– GP financial and tax statements
– Portfolio company governing documents
– Limited portfolio company diligence, including review of its litigation profile (including lien and litigation searches) and material contracts

A continuation asset’s representations in a typical structured secondaries transaction are generally limited to “fundamental plus” representations regarding the GP’s ability to consummate the transaction, certain limited tax matters and knowledge-qualified statements regarding the operation of the specific asset. Acknowledging that the above diligence scope sufficiently supports such representations, RWI carriers have adapted their underwriting requirements accordingly.

The memo also discusses the benefits that RWI provides to both departing LPs and new investors, which pretty much mirror the benefits provided to sellers in other settings where RWI is used.  It also says that the terms offered by insurers are more insured favorable than is the case in typical M&A settings.

John Jenkins