Memorandum
GP-Led Secondary Transactions Alert: Recent Developments
May 24, 2023
Two recent developments relating to increasing investor protections around GP-led secondary transactions (alsocalled “adviser-led secondary transactions”) by the Securities and Exchange Commission (“SEC”) and theInstitutional Limited Partners Association (“ILPA”) could lead to potential changes in processes around these
deals. The SEC adopted new reporting rules for sponsors that engage in such GP-led transactions and ILPA has
released its own revised guidelines for such transactions.

SEC Quarterly Reporting Rule
Early last year, the SEC proposed two rules that specifically targeted adviser-led transactions: a requirement thatprivate fund managers must report to the SEC within one business day upon the occurrence of an adviser-led
transaction and a mandate that investors be provided a fairness opinion and a written summary of certain
material business relationships between the adviser and the opinion provider in connection with an adviser-ledtransaction. The SEC has now adopted one of those proposed rules (with certain modifications), requiring all
private equity fund managers that engage in an adviser-led secondary transaction to report such transactions
within 60 days after the quarter in which such transactions occurred. Such quarterly reporting will be on Form PF,
a confidential form relating to private funds and intended to be used by the Financial Stability Oversight Council(“FSOC”) for systemic risk oversight purposes.
The SEC has noted that receiving this information on a quarterly basis will provide timely notice of these private
equity events and important information for its regulatory programs, including examinations, investigations,investor protection efforts, and policy relating to private fund advisers. The SEC believes it will also improve its,
and the FSOC’s, ability to evaluate material changes in market trends at the reporting funds by providing
information on certain events that could significantly affect both investors and markets more broadly.
The increased timeframe for reporting adviser-led secondary transactions is welcome news to sponsors, who had
been concerned with the originally proposed one-business day reporting requirement. However, sponsors are stillwary of how the SEC may use such information, and whether reporting the closing of an adviser-led secondarytransaction will trigger an examination or investigation. The SEC has indicated that these transactions include ahigher potential for conflicts of interest or fund distress and generally may signal an investor protection issue at aparticular fund, and these transactions may present an opportunity to flag situations where the SEC may need tomore carefully evaluate whether conflicts of interests have harmed investors.

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2The SEC defines an “adviser-led transaction” as one initiated by the adviser (or any related persons) offering
private fund investors the option of (i) selling all or a portion of their interests in the existing fund; or (ii)converting or exchanging all or a portion of their interests in the existing fund for interests in another vehicle
advised by the adviser (or its related persons). Single-asset, multi-asset, strip-sale, full-fund restructurings andprivate tender offers would all generally be considered adviser-led transactions subject to the new rule. If anadviser-led secondary transaction (or other reporting event, including investor election to remove a fund’s generalpartner or to terminate a fund’s investment period or a fund) does not occur during a particular quarter, then anadviser will not be required to file a report for that quarter. These reports are only required to be made by thesponsor initiating the transaction, not by any investor, and will be required beginning in November 2023.
The SEC has not yet addressed the proposed rule on requiring a fairness opinion from an independent provider,but the ILPA guidelines do suggest that such an opinion should be obtained for all GP-led transactions.

New ILPA Guidelines for Continuation Fund Transactions
In response to what ILPA refers to as “growing LP frustrations around these transactions,” the organization issued
new guidance last week on continuation funds, which follows their broader paper on GP-led secondarytransactions published in April 2019. The newly-issued guidance largely restates and extrapolates the contents ofILPA’s 2019 guidance on GP-led secondary transactions, and focuses on four key areas of concern: conflicts
mitigation, transaction process and timing, deal terms and documentation and recommendations for investors.
The general guiding principles of the guidance are that (i) continuation fund transactions should maximize value
for existing investors, and (ii) rolling investors should not be left in a less favorable position than if the transaction
had not occurred. Given the tremendous variety in, and bespoke nature of, continuation fund transactions, ILPA
emphasized that their guidelines are intended to provide general parameters and may not be universallyappropriate.
CONF LI CT M ITI GA TIO N
The guidelines recommend that GPs:
• present the rationale for the proposed transaction to the LPAC of the existing fund at the earliest possible
opportunity (ILPA suggests even prior to hiring an advisor for the transaction) and should have already
explored alternative avenues for obtaining liquidity for the relevant asset(s);• present all conflicts (even if pre-cleared by the governing documents of the existing fund) to the LPAC;• run a competitive bidding process including validation of valuation (ILPA suggested a fairness opinion froman independent financial adviser, a partial disposition to a third party or an arms-length transaction
through a minority stake could all be helpful);• the LPAC review and approve any break-up or termination fees payable in the event the transaction is notcompleted;
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• disclose all necessary information so that the LPAC may consider proposed conflict waivers and the broader
investor base may evaluate its decision to roll or sell (ILPA lists recommended disclosures on the bids andprocess, information on the selected asset(s) and other information when the transaction is especiallycomplex); and• provide parity of information as between (i) the LPAC and the investors who do not sit on the LPAC as wellas (ii) the existing investors and the new investors.
P R OC ESS A ND TIM IN GILPA recommends that in connection with any continuation fund transaction:• sponsors should engage experienced advisors to facilitate the transaction that such, advisors should beaccessible to the investors and the LPAC should review the advisor’s role, scope of services and the fee
arrangement;• the LPAC should have the opportunity to review the proposed deal terms at least 10 business days prior tofinalizing such terms;• investors should be given the longer of 30 calendar days or 20 business days to make an election, withflexibility to extend such period for limited partners subject to institutional legal requirements to the extent
this would not present substantial execution risk; and• investors who do not make any election should be treated as having elected to sell, which is a departurefrom ILPA’s 2019 guidance on such situation being that those investors be placed in the continuation fundwith no change in economic terms from the existing fund (the “status quo” option).
D E AL TE RMS AN D DO C UM EN TA TI ON
ILPA’s latest guidance recommends certain best practices for deal terms and documentation for continuation fundtransactions, including that:• rolling investors receive the benefit of any existing fund side letters in connection with their investment in
the continuation fund, to the extent applicable;• continuation fund formation expenses be borne by rolling investors and new investors;• transaction expenses be subject to a cap;
• selling investors only bear their pro rata portion of sale transaction expenses;• should the LPAC approve a transaction that does not ultimately proceed, the existing fund should bear suchbroken-deal costs;• there should be no crystallized carry for rolling investors and all carry accruing to the GP related to sellinginvestors’ interests should be rolled into the continuation fund;Simpson Thacher & Bartlett LLP

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• investors should be offered a status quo option (same economics as in the existing fund); and• any dilution of existing investors should be done on a fair and reasonable basis.
R E C OMMEN DA TI ONS F O R EX ISTI NG IN VES TORSILPA’s recommendations to existing investors in funds that may be participating in a continuation fundtransaction are to generally collaborate with the sponsor, including by:• preemptively establishing internal protocols to respond to these transactions (such as approvals,underwriting process, and understanding legal requirements);• working with sponsors to set timing expectations around reviews, negotiations and approvals;• reviewing existing fund documentation, new documentation/deal terms, models and materials necessary to
be informed and to ensure informational symmetry between the existing investors and potential newinvestors; and• going forward, consider the potential for GP-led transactions when diligencing, reviewing and negotiating
fund documents in connection with potential primary investments.

Key Takeaways for Sponsors Considering GP-Led Secondary Transactions
In addition to the new reporting requirement, the SEC’s recently published exam priorities noted a “focus on RIAs
to private funds with specific risk characteristics, such as: …private funds involved in adviser-led restructurings,including stapled secondary transactions and continuation funds.” This is a clear signal that the SEC is focused on
GP-led secondary transactions, and in particular on the inherent conflicts of interest involved, while ILPA notedthat as continuation fund transactions increase in prevalence, greater transparency and consistency will be criticalgiven the conflicted nature, short timelines and complexity of these transactions.
The SEC specifically noted two concerns in its recent final published rule. First, the SEC notes that investors areoften given very short timeframes in which to choose whether to cash out of their investment or participate in anadviser-led secondary transaction and are not always able to sufficiently diligence the transaction before theymust decide to whether to commit to it. Second, the SEC noted that, while some advisers seek advisory board
consent for these transactions, these advisory boards are comprised of only the largest investors in the fund andthe adviser does not seek consent from the remaining investors. ILPA also focused on ensuring a longer timeframe
for investors to make their elections with respect to continuation fund transactions.
As a result, we expect that sponsors engaging in a GP-led secondary transaction will generally provide investors atleast a 20 business day timeframe (which is the most common timeframe, the minimum required by private
tender offer rules, and the recommendation in the new ILPA guidance).

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5In addition, sponsors may want to consider seeking consent from a majority of all investors in appropriate
circumstances, even if the fund’s governing documents only require advisory board approval, given the SEC’s
noted concern on approvals.
Finally, given the highly bespoke nature of these transactions, although existing investors will likely push formuch of the ILPA guidelines to be implemented, sponsors will likely choose only certain of the recommendations
as some won’t be practical or relevant in the specific circumstances of such transaction.

CONTACT THE AUTHORSFor further information about this memo, please contact the following authors: Lauren A. King, Alexander B.
Starr, or any other member of the Fund Transactions group below.
FUND TRANSACTIONS GROUP
Drew Harmon+1-212-455-2841
drew.harmon@stblaw.com

Lauren A. King
+1-212-455-7962
lauren.king@stblaw.com

Matthew Gabbard+1-212-455-3521
matthew.gabbard@stblaw.com

Alexander B. Starr+1-212-455-3517
alex.starr@stblaw.com

Michael W. Wolitzer+1-212-455-7440
mwolitzer@stblaw.com

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