USA Trends and Developments Contributed by: Scott Naidech, Basil Godellas, Alan Roth and Jacqueline Hu, Winston & Strawn
Continuation Funds Rising GP-led secondaries have become a mainstay of the private funds landscape, and their prominence con - tinues to expand. Over the past decade, these trans - actions have become a well-established mechanism for offering liquidity solutions to general partners and investors. The typical continuation fund transaction (although one should expect a fair degree of customi - sation in any such process) will often include the fol - lowing features: • a new “continuation vehicle” (CV) being formed by the sponsor, which is capitalised by new limited partners (ie, who will invest as new limited partners in the CV); • new investors are typically secondary funds or sophisticated institutional investors; one or more lead investors will typically lead the investment in the CV (and negotiate terms with the sponsor); • a GP-organised process to proactively offer liquidity to existing limited partners and to secure additional time and/or capital for all or select fund investments; • an election process in which current fund limited partners are offered the opportunity to elect to cash out of the existing fund (a “cashout” option) or roll over their interests (a “rollover” option) into the new CV; and • depending on the structure and terms, current fund limited partners may be offered a “status quo” option (in which they roll over to the CV on the same economic terms). Because these transactions include the sale of one or more portfolio assets among affiliated entities con - trolled by the same adviser (or affiliated advisers), con - flicts of interest should be disclosed and appropriately approved (often by the fund’s limited partner advisory board) as part of the transaction process. Moreover, as a general matter it will be important for a fund gen - eral partner to show a full and fair process by which pricing was achieved, often involving hiring a financial adviser to lead a secondary process. Typically, a fair - ness opinion or valuation report will be obtained in connection with the transaction (along with disclosure of any conflicts involved with respect to an institution issuing such fairness opinion or valuation report).
Overall, these transactions have become an excel - lent way to achieve liquidity for investors in both sin - gle- and multi-asset sale transactions. When done right, these transactions facilitate price maximisation through an arm’s length auction process and provide investors with an option to achieve liquidity or main - tain their existing stake. Moreover, these transactions allow fund general part - ners to pursue liquidity options even where the mar - ket for underlying portfolio assets may not be ideal or where they need more time to achieve optimal value. The CV is a vehicle through which a fund sponsor can: • raise additional follow-on capital; • extend the holding period of portfolio assets; • secure new fees and carried interest (at a reset net asset value) in order to better align the incentives of the investment team with investors; • introduce new investors to the platform with the potential to provide additional financing support for future fundraises; and • provide new investors with exposure to a concen - trated portfolio which they are able to diligence. These transactions are highly bespoke. Sponsors seeking to pursue liquidity options through CVs should consult their legal counsel to ensure that the transactions are being structured in a manner that: • comports with market terms; • maximises value and utilises an optimal structure for tax and other legal purposes; • complies with all U.S. Securities and Exchange Commission guidance and rules; and • demonstrates overall fairness to existing fund investors. SBIC Programme As the fundraising market has tightened, there has been a significant increase in the number of venture capital and private equity funds applying to operate as a small business investment company (SBIC). SBICs are licensed and regulated by the U.S. Small Busi - ness Administration (SBA) and subject to the Small Business Investment Act of 1958, as amended, and the rules and regulations promulgated thereunder (the “SBIC Act”). Most licensed SBIC funds apply for
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