Investing and allocating capital
What Should Investors Examine in the Terms of a Secondaries Transaction?
Short answer. Examine what exactly is being transferred, the seller's authority, the price and valuation basis, required approvals, fees, liabilities, and the rights that carry over after closing. Confirm how you can receive information and eventually exit. Have counsel review transfer restrictions and the full transaction documents before signing.
In a secondaries transaction, examine the asset being transferred, the seller's authority to transfer it, and the rights that come with the position. The headline price is only one part of the decision. You also need to understand approvals, obligations, information access, and how a future exit could work.
Establish What You Are Buying
Confirm whether you are acquiring fund interests, shares in a private company, or an interest in a special purpose vehicle. These structures can carry different rights and obligations. Review the governing documents and ask whether the seller has made any capital commitments that remain unpaid or whether you would assume other liabilities after closing.
Check the transfer process and identify every required consent. A company, fund manager, or other investors may have approval rights, a right of first refusal, or other restrictions. The seller should provide evidence of ownership and authority, and the agreement should state what happens if required approvals are not obtained.
Test the Price and Valuation Basis
Ask how the proposed price was determined and what information supports it. For a fund interest, review the underlying portfolio, reported valuations, unfunded commitments, distributions, and any expected cash needs. For private company shares, understand the company's financial condition and the rights attached to the shares. A price discount does not by itself establish value, especially if the position is illiquid or the available information is limited.
Consider what could change between signing and closing. The transaction documents should explain how distributions, capital calls, and other economic events are handled during that period. Clarify who bears fees, taxes, transfer costs, and any adjustments to the purchase price.
Understand Rights After Closing
Determine what information you will receive and whether you will have voting, consent, or participation rights. A secondary buyer may not receive the same rights as the original investor. Confirm how decisions are made, whether the manager can call additional capital, and what penalties apply if a capital call is not met.
Review the path to liquidity. Private positions can take years to sell, and a future buyer may be scarce. Identify any lockups, transfer limits, redemption provisions, or manager approvals that apply. The documents should also set out how disputes are resolved and whether you can transfer the interest again.
Review the Complete Transaction Package
Get the purchase agreement, governing documents, financial information, and required consents before committing. Discuss legal and tax specifics with your attorney and CPA. In my experience, clear expectations and a defined beginning, middle, and end help both sides identify issues early.
Related reading includes assessing private market valuations, understanding lockups and withdrawal limits, negotiating reporting and investor rights, and choosing between a pooled fund and a separate account.
Everything has a beginning, middle, and end.
Sources: The Single Family Office. Informational only, not financial, legal or tax advice.