Articles

“Everything changes and nothing stands still.” – Heraclitus, Greek philosopher With few exceptions investment funds were not meant to last forever. Investors seek to cash out, while new investors want to join in. The challenge comes during the transition of the old investors leaving and the new ones entering: The original investors want one thing: their money (along with its accumulated growth) free and clear. New investors want to move forward without legacy risk. Between these interests lies the General Partner (GP) or sponsor, who has a foot on both sides of the fence. The biggest concern for new investors is potential Excluded Obligations – financial liabilities of the Seller Vehicle (SV, the original fund) that “leak” over to the continuing vehicle. This can happen where the GP serves a dual role on the SV as well as the Continuing Vehicle (CV). Therefore, the risk of an expensive “wrong pockets” case can drag in new investors – something they keenly want to avoid and can be the source of protracted negotiations. Enter a new risk transfer vehicle – Secondaries insurance. This coverage is designed specifically to address this exposure by providing legal defense expenses as well as settlement and judgement costs protecting the CV’s assets. This insurance is the natural by-product of Representations & Warranty (R&W) insurance, which has become a favorite of PE firms for more standard acquisitions (it’s featured in 90% of deals these days). R&W insurance elegantly moves financial risk from the deal parties to an insurer. As was the case with R&W in its early days, Secondaries is new and therefore seldom used. But we expect Secondaries to become as ubiquitous as R&W coverage as PE firms and Independent Sponsors seek a smooth transition. Just as R&W revolutionized M&A transactions, Secondaries serves as a facilitator that