Much has been made of the advantages for stakeholders in GP led secondaries and with traditional routes for exit reduced in the current environment, there has been an understandable and significant uplift in these transactions and they are here to stay.
The Paragon M&A team have worked on insuring several of these transactions over the last 6 months, advising both the selling (and buying fund) as well as the cornerstone investor. The combined enterprise value totals almost $4 billion.
Can you insure the underlying transaction and obtain coverage under a warranty and indemnity policy that is commensurate with a traditional single asset secondary buy-out? Yes. Is it easy to do? Absolutely not.
Insuring secondaries transactions remains a relatively nascent area however the evolution of the M&A insurance market, especially in the last 10 months, has forced underwriters to adapt and mould their underwriting appetite around the shape of the broader M&A market. This means that there is now a handful of insurers who have the knowledge and understanding of the structures, and crucially the experience, to execute them efficiently.
Insuring these transactions with meaningful value requires a team of advisors who have a deep understanding of:
(a) how to manage the potential perceived conflicts of interest that arise with the use of continuation funds; and
(b) how to manage the differing due diligence approaches taken by the GPs and third party investors in order for the continuation fund vehicle to gain fulsome warranty protection.
Precise, early and pragmatic advice is paramount in ensuring a smooth process and full scope warranty protection.
When Audax Group raised $1.7 billion for its so-called "continuation fund" in January, it joined a growing list of PE houses that have started creating liquidity by buying their own portfolio companies. Such deals aren't an entirely new concept, but their wider acceptance under the label of "continuation funds" is notable because they give PE firms more wiggle room to hold on to companies longer. They are also expected to gain popularity at a time when many funds, reeling from the impact of the pandemic, are looking for new ways to offer their investors liquidity.