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Considering a Secondary Transaction? You Should Also Consider a Fairness Opinion

It’s been just over a year since the SEC proposed new regulations that, among other things, would require private fund advisers to obtain third-party fairness opinions in connection with adviser-led secondary transactions. Although the final form of the regulations remains unknown, it’s likely they will be finalized in the first half of this year, and private fund advisers will have new requirements intended to increase transparency for fund investors.

Many private equity participants expect that traditional exit routes will remain challenging given public market volatility and uncertainty in interest rates and inflation. As such, funds will increasingly need to seek alternate liquidity options this year and beyond, including secondaries. According to data from PitchBook, secondary transactions reached record levels in the first half of 2022 before slowing in the second half of the year, largely due to lower offering prices from potential buyers. Thus far, in 2023, widening bid-ask spreads have been reported across several industries. This environment, paired with the pending SEC regulations, makes it more imperative than ever that private fund advisors obtain independent fairness opinions in connection with their secondary transactions.

A fairness opinion is a statement from an independent financial expert that the consideration paid or received in a transaction is fair from a financial point of view.  An opinion provided by an independent financial expert provides an objective evaluation and helps the recipient of the opinion, typically the general partner (“GP”) of the fund, make an informed decision regarding the transaction. Although not a substitute for the GP’s own evaluation, independent fairness opinions help GPs demonstrate that they executed their fiduciary duty of care, acted in good faith, and conducted appropriate due diligence in connection with the transaction.

Even if the proposed SEC regulations are changed before finalization and do not require third-party fairness opinions in connection with adviser-led secondaries, obtaining an independent fairness opinion should remain a best practice given the potential conflicts of interest in such transactions.

With decades of experience and the support of our Opinion Committee, Centri’s opinion team is ideally suited to provide a truly independent, defensible fairness opinion that can help GPs make prudent, well-informed decisions. If you are considering a secondary transaction, consult with your attorney and Centri’s opinion team to see if obtaining a fairness opinion is the right course of action for your fund.

Charles Higgins

Managing Director | CFA

Charles is a Managing Director at Centri Business Consulting. He has more than 25 years of experience in providing fairness and solvency opinions in connection with going private transactions, spin-offs, related-party transactions, recapitalizations, and restructurings. He...