Private equity secondary transactions and Jersey specific issues

Private equity (PE) secondary transactions have grown significantly in recent years, driven by increasing liquidity needs among investors triggered by geopolitical uncertainties, public market volatility significant declines in M&A activity and in general slower exit environment. The secondary market allows investors to buy and sell existing stakes in private equity funds, providing liquidity and portfolio management flexibility. 

According to the data provided by Private Equity International as derived from Evercore's FY 2024 Secondary Market Review, the secondaries transaction volume hit $160 billion in 2024 with GP-led and LP-led deals distributed roughly evenly in terms of the transaction volumes. This represents an increase of circa 40% when compared with 2023 and an increase of almost 220% when compared to 2020.

Secondary transactions can take several forms, each with its unique structure and terms and are ordinarily effected by:

a) LP led secondaries, which include direct transfers of LP interests between LPs;

b) GP led secondaries that include:

a. creation of continuation funds with an option for the existing LPs to rollover their investments in full or in part; 

b. GP led tender offers; 

c. preferred equity investments, which are usually effected:

i. at the portfolio company level, by creating a new intermediary SPV company that issues preferred shares to the senior preferred equity investor, or

ii. at the fund level, where GP issues new class of investor interest to the preferred equity investor, which confers preferred economic rights;

d. creation of annex funds, which entails creation of an additional fund by the GP for the new annex fund investors and existing fund investors to invest in the same portfolio investments as the existing fund; 

e. equity strip sales, which include partial sale of the fund's portfolio company investments to the new investors; and

c) synthetic secondaries, which include forming a new fund specifically for the acquisition by the new fund of an entire portfolio of direct investments from the existing fund.

As secondaries transactions draw on elements from the partnership law, private equity funds documents and standard M&A terms and documentation, they are often viewed as more complex from a structuring and transaction documents perspective. 

LP led secondaries

Limited Partner (LP)-led secondary transactions involve an LP selling their stake in a private equity fund to another investor. This provides liquidity to the seller without disrupting the fund’s investment strategy. The seller could retain some exposure to future upside while selling a portion of the interest. In case of stapled secondaries, the investor commits fresh capital to a new fund managed by the GP alongside purchasing the existing LP interest. 

GPs are invariably involved to approve the transfers of LP interests under the terms of the limited partnership agreements. GPs also must make sure that the new LP meets the requirements of a sophisticated investor and otherwise conducts relevant CDD checks in respect of the new LP to comply with Jersey statutory requirements. These could take additional time, and it is thus usually advisable to alert the GP of the coming LP-led transaction at the earliest to ensure swift exchange and completion when time comes.  

GP led secondaries

1) Continuation fund

A new vehicle is created to acquire assets from the existing fund, allowing the GP to continue managing them. This ordinarily involves the need to seek approval of the LPs or the selling fund's LP advisory committee. LPs either sell their interest or rollover their investment into continuation fund. 

In line with the market practice and ILPA guidance issued in May 2023 and in order to mitigate GP's conflict of interest concerns, GPs ordinarily seek the fairness opinion issued by a third party opining on the fairness of the fund's restructuring and valuation of the purchase price. These practices have been recently endorsed by the UK Financial Conduct Authority in its findings published on 5 March 2025. To further align GP's interests with the LPs, crystallized carry is often reinvested by the GPs in the continuation fund. 

Depending on the type of the continuation fund and the existing fund and type of LPs expected to be rolled over into the continuation fund, additional consent of the Jersey Financial Services Commission ("JFSC") may need to be sought. 

Among other transaction documents, the GP usually prepares a confidential information memorandum setting out the terms of the fund restructuring and rolling over investments in the continuation fund. This document in some instances may be viewed as a prospectus for purposes of Jersey laws and thus will need to be checked for compliance with Jersey requirements applicable to prospectuses and offerings of securities by Jersey limited partnerships and companies.

Benefits of using Jersey as a domicile for continuation funds:

a) Jersey is an award-winning and highly reputable international finance centre widely used by the GPs when setting up the funds;

b) Jersey has a wealth of highly qualified world-class finance, tax, legal, audit and fund administration professionals experienced in working on most challenging and innovative fund structures;

c) non-Jersey fund vehicle can be migrated to Jersey in a straightforward and expedient process; 

d) Jersey provides for a light touch regulation option, namely Jersey private fund, which in most cases may be approved by the JFSC in 48 hours;

e) Jersey provides a variety of options that GP teams can pursue when setting up the fund in the form of a par value or no par value company, cell company (protected or incorporated), LLC (which can be tax neutral), traditional LP or separate LP and incorporated LP.

Financing options

With the growth of continuation fund activity come opportunities to leverage existing fund finance products and know-how.  Continuation fund sponsors have a wealth of bespoke financing options at their disposal, and it is anticipated that utilisation of leverage by continuation funds will grow and quickly evolve against the backdrop of recent market conditions which have stifled M&A activity and other opportunities to realise investments.  Capital call, NAV, asset-backed or hybrids thereof are all types of facility that may be deployed, each requiring a nuanced understanding of the investor base, asset pool and sponsor strategy.  Our dedicated Channel Islands fund finance team is well placed to advise on such facilities.

2) GP led tender offers

Unlike continuation funds, tender offers are discretionary. In these transactions, the GP arranges for a buyer to purchase LP interests, giving LPs an option to sell or remain in the existing fund on the same terms. The capital raised from the secondary buyers is used to buy out the tendering LPs. Occasionally, new investors also commit to subscribe for a stapled investment in another fund to be raised by the GP.

Just as with the continuation funds, confidential information or tender offer memorandum to be provided to the LPs in connection with the tender offer should also be checked for compliance with Jersey requirements applicable to prospectuses and offerings of securities by Jersey limited partnerships and companies.

In case of any secondaries transaction discussed above, it should be noted that any significant change in the LPs may warrant additional filings having to be made with or authorisations being sought from the relevant regulators if the fund's portfolio investment is a regulated business, eg banking, insurance etc. For instance in case of regulated businesses in Jersey, this may warrant liaising with the JFSC, which could take additional time and should be taken into account. 

Closing 

We have acted for the largest institutional investors and sponsors on a number of secondaries transactions and our corporate and funds teams have unique experience in providing bespoke and innovative legal solutions to GPs and LPs on a variety of alternative liquidity solutions.  

On a related note, you may be interested to read our recent series on Jersey Investment Fund Structures - Which one to choose?