Insurance for Secondaries Funds: Representation & Warranty, D&O Coverage, and Portfolio Risk Management

Secondaries funds require specialized insurance addressing transaction risks from LP interest acquisitions with limited seller representations, director and officer liability as fund sponsors, errors and omissions from advisory activities, and indirect portfolio company exposures inherited through acquired stakes. Insurance programs balance comprehensive protection with cost efficiency recognizing secondaries' lower operational intensity versus direct portfolio company management.

Representations and Warranties Insurance

R&W insurance protects buyers against seller representation breaches in LP interest acquisitions. However, secondaries sellers often provide minimal representations given secondary nature of sales limiting R&W applicability. When available, coverage addresses seller representations regarding ownership, authority, no conflicts, and limited fund document representations. R&W proves more valuable in larger transactions with negotiated representations versus smaller opportunistic trades with minimal seller commitments. The CFO evaluates R&W economics comparing premiums and retentions versus protection value given specific deal representations and known risks.

Directors and Officers Liability

D&O insurance protects fund managers against investor claims, regulatory investigations, and employment disputes. Coverage limits typically range from $10-50 million depending on fund size with premiums scaling with assets under management. Secondaries-specific considerations include potential claims from underlying fund GPs alleging investor misconduct, disputes with sellers over purchase price adjustments or representations, and regulatory scrutiny of transfer approvals or beneficial ownership. The CFO ensures adequate D&O limits covering realistic claim scenarios.

Indirect Portfolio Company Exposure

Acquiring LP interests creates indirect exposure to underlying portfolio company risks including operational liabilities, environmental issues, and litigation. Limited partner status typically shields secondaries funds from portfolio company liabilities absent extraordinary circumstances like piercing corporate veils. However, prudent risk assessment considers portfolio concentration, known issues, and potential exposure requiring insurance or deal structure modifications addressing elevated risks.

Key Takeaways

• R&W insurance has limited applicability: Secondary LP interest sellers typically provide minimal representations constraining R&W coverage utility versus primary transactions with extensive reps.
• D&O coverage protects fund managers: Investor claims, regulatory matters, and transaction disputes require comprehensive D&O insurance protecting directors and officers.
• Limited partner status typically shields from liability: LP stakes generally avoid direct portfolio company exposure though prudent risk assessment considers concentration and known issues.
• Insurance programs are simpler than direct investing: Secondaries' arms-length exposure to portfolio companies reduces operational insurance needs versus funds directly controlling companies.