Fairness Opinions in Structured Secondaries

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Structured secondary transactions: GP led transactions and fund restructurings have been a key theme in the secondary market over the past year as many vintage funds from the boom years reach their tail end. Many of these situations see large amounts of retained, unrealized value in a portfolio without the appropriate capital or incentive arrangements required for value generation.  Investors are increasingly looking at these positions as opportunities to deliver solutions for LPs and GPs.

Conflict: These types of structured secondary transactions typically give rise to conflicts of interest between GPs and LPs, particularly around the pricing of assets. To minimize litigation risk from LPs and to ensure GPs discharge their fiduciary duties, GPs are turning to fairness opinions as a tool to provide transparency and demonstrate independence.

What is a fairness opinion: A fairness opinion is an opinion provided by an independent financial advisor confirming that the consideration payable in a transaction is fair to the seller from a financial point of view. The opinion takes the form of a short letter (3 – 10 pages) usually addressed to the GP setting out the scope of the opinion and the assumptions upon which it has been given.

Process and cost: A financial advisor will undertake a detailed due diligence exercise to determine a range of values for the assets being sold, a process that normally takes around a week to complete. The GP will be required to deliver a rep letter to the financial advisor confirming the accuracy of the information disclosed. The cost of a fairness opinion in a private transaction will vary depending on the size and complexity of the deal and the reputation and experience of the opinion provider.