Legal considerations and transaction documentation for secondary market investments
Legal considerations for secondaries funds span both fund formation and ongoing transaction execution. Beyond the standard partnership documentation required for any private fund, secondaries managers navigate complex transfer agreements, consent processes, and transaction structures that require specialized legal expertise. Building relationships with counsel experienced in secondary market transactions supports efficient deal execution.
Like other private funds, secondaries vehicles require foundational legal documentation:
The LPA governs the relationship between the GP and LPs, including:
Secondaries LPAs often include specific provisions addressing potential conflicts when the fund participates in GP-led transactions, given that sellers and the secondaries fund may have different interests.
The PPM provides detailed disclosure to prospective investors about the fund, its strategy, risks, and terms. Secondaries-specific disclosures often address:
The nature of secondary market investing and how it differs from primary fund commitments.
Valuation methodology for acquired positions and the reliance on underlying GP valuations.
Conflicts of interest, particularly regarding GP-led transactions where continuation vehicles may be sponsored by related parties.
Information access limitations and the use of confidential data obtained during due diligence.
Subscription agreements and investor questionnaires collect LP information and commitments. For secondaries funds, these typically include standard representations regarding investor qualification, ERISA status, and tax matters.
Each secondary transaction generates substantial legal documentation:
PSAs govern the acquisition of fund interests from selling LPs. Key provisions include:
Most private fund partnership agreements require GP consent for LP interest transfers. The consent process involves:
Submitting transfer requests to underlying fund GPs with required information about the buyer.
Addressing any conditions the GP imposes for granting consent.
Obtaining written consent documentation that becomes part of the transaction record.
The time required to obtain consents varies and can affect transaction timing.
These documents formally transfer rights and obligations from seller to buyer, documenting that the buyer assumes the seller's position in the partnership including any unfunded commitments.
Continuation vehicles and other GP-led transactions involve additional legal complexity:
Conflict management provisions addressing the GP's dual role as sponsor of the continuation vehicle and fiduciary to existing LPs.
Stapled commitment requirements where participation in the continuation vehicle requires new capital commitments.
Modified economic terms that may differ from the original fund, including reset fees and carry structures.
Election procedures allowing existing LPs to choose between rolling into the continuation vehicle or receiving liquidity.
Legal due diligence on potential acquisitions examines:
Underlying fund documentation to understand transfer restrictions, consent requirements, and any provisions affecting the acquired position.
Seller authority and ownership to confirm the seller can transfer the interests being purchased.
Outstanding obligations including unfunded commitments that will transfer to the buyer.
Any litigation, claims, or disputes affecting the underlying fund or interests.
Secondaries funds typically engage outside counsel for both fund formation and transaction work. When selecting counsel, consider:
Legal compliance extends to regulatory matters including:
Securities law compliance for fund offerings and transaction execution.
Investment adviser registration and compliance requirements.
Cross-border regulatory considerations for non-US transactions.
ERISA and tax-exempt investor considerations affecting fund structuring.