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Editor’s Letter: Is the private equity secondaries market vulnerable?

The consensus regarding the arrest and charging of former Park Hill Group executive Andrew Caspersen is that the situation is not good for the private equity secondaries business. 

While a few sources made the point that one bad actor doesn’t implicate an entire industry, several secondary market sources say it’s especially bad for secondaries. This is because this niche strategy, in an already niche market like private equity, is young and growing.

Secondaries has lost its stigma in recent years. In the past, the feeling was that if you were selling an interest in a fund, it was a mark against the GP. That has changed and now we’re at a point in which most people understand secondary sales are more about portfolio management than popularity. 

What the secondaries market didn’t need was a full-blown scandal to leave even a hint of doubt in a potential seller’s mind, especially institutions that answer to politically elected boards like many public pensions. 

This gets trickier when considering the business of restructuring older private equity funds — a niche strategy in a niche corner of the already niche PE industry.

The market has held at record or near-record secondaries transaction volume for the past few years and appears to be only growing. Helping drive that volume are so-called GP-led liquidity solutions like restructurings — ways in which firms provide investors in older funds with exit options. 

Caspersen’s alleged scheme used a name very similar to the name of a large restructuring process in the market last year: Irving Place Capital Partners III. Park Hill ran the process, in which Coller Capital led an investor group that bought out existing Fund III LPs and kicked in fresh capital for new investments.

To be clear, the charges against Caspersen don’t relate to the actual Irving Place restructuring deal. But the two situations are bound up: Every time you read about Caspersen, you see the name Irving Place. You read about secondaries. 

Further, restructurings have come under the scrutiny of the Securities and Exchange Commission in recent years. The agency is focused on making sure that existing LPs are not forced into “two bad options,” Igor Rozenblit, co-head of the private-funds unit in the SEC’s Office of Compliance Inspections and Examinations, said at a conference last year.

In February, Rozenblit told the audience at Private Equity International’s CFO and COOs Forum that the SEC was watching so-called zombie funds, aging funds with managers who aren’t likely to raise new money. These are the types of funds ripe for restructuring.

Zombie funds “may be tempted to resort to creative approaches in markets that are less favorable,” Rozenblit said, according to PEI.

Restructurings are a creative market solution to a growing problem: how to fairly end private-equity funds.

It’s been interesting to watch the industry not only come up with a way to deal with aging PE funds, but also to tweak this process to make it as fair as possible to all players. What started out as “the Wild West” a few years ago, one secondary source said, has become increasingly streamlined and, importantly, gives LPs the chance to have their voice as part of the process.

It would be unfortunate if this one situation stunts the growth of this important strategy.

Photo of Chris Witkowsky by Wendy Witkowsky