Tom Angell, Practice leader of Withum’s Financial Services Group, discusses the potential for conflicts of interest in secondary transactions. Secondary transactions often occur to restructure the fund, to provide liquidity in an illiquid fund, or as a tax strategy. Since currently, 32% of secondary deals are led by the General Partners (a significant increase over the past couple years), this creates an increased risk for conflicts of interest to occur. GPs have a fiduciary duty to provide accurate and truthful information to the Limited Partners, to disclose any potential conflicts of interest, and to treat all LPs fairly, so that they can make an informed decision before entering into a secondary transaction.
Regulators will continue to focus on protecting investor interests. There have been recent enforcement actions surrounding improper or stale valuations provided by GPs in the secondary market, that could potentially take advantage of LP investment interests. GPs should consider using an outside valuation specialist to reduce this risk.