Last week in our special series on private equity secondaries, we discussed how GPs are leveraging newly developed liquidity in that market to manage funds and assist their LPs with their specialized investment needs. Given today’s challenged capital markets it’s also tougher to extract expected values from your best properties. 

Sponsors are looking inwards and leaning into “know what you own,” our head of secondaries, Nick Lawler, tells us. They can raise incremental capital, continue investing in and owning a “trophy” asset, while not breaching concentration limits in a traditional fund structure (usually set at 15-25% of a fund’s total cost basis). Secondary trades enable the fund to not have an overly elongated hold.

A core element of CVs is optimal alignment of interests between the GP and their LPs. Active PE partners are required to roll 100% of their carried interest and GP commitment associated with the assets as their commitment going into the CV. The sponsor may be compelled to invest fresh equity from their personal balance sheets for any unfunded equity in the vehicle, or simply for even greater alignment. This can put more of the partners’ personal capital at risk than in a traditional fund construct.