NYPPEX Announces Eight "Rules" When
Divesting Private Equity Funds
Secondary Private Equity Market Commentary
by Laurence G. Allen
September 8, 2021 – NYPPEX, one of the world’s leading providers of secondary private equity liquidity, today announced eight principles for qualified investors to better achieve their objectives when divesting private equity funds worldwide.
In regard to these principles, private equity funds are defined as all alternative investment strategies such as buyout, venture, real estate, fund of funds, natural resources, infrastructure, distressed debt and hedge.
With these eight principles, NYPPEX not only shows some of its internal market strategies, but also seeks to provide a better understanding of the secondary private equity markets worldwide and help qualified investors avoid pitfalls.
The NYPPEX Eight “Rules” to Success When Divesting Private Equity Funds are as follows:
Rule One: Know your Objective.
NYPPEX believes that high performance investors typically seek to divest private equity funds for one of three reasons: 1) reduce risk, 2) optimize returns and/or 3) attain liquidity.
Rule Two: Have a Portfolio Rebalancing Strategy.
NYPPEX believes that typical rebalancing strategies for alternative investment fund portfolios contain one or more of the following themes: 1) divest underperforming funds, strategies, vintage years or regions and/or 2) reinvest cash proceeds in outperforming funds, strategies, vintage years or regions.
Rule Three: Don’t Premarket Funds To Learn Price.
NYPPEX believes that investors should select an experienced secondary advisor that can provide accurate bid indications without shopping their funds to prospective buyers.
Rule Four: Select An Advisor With A Record For Executing A High Percentage Of Sell Orders.
NYPPEX believes if an investor places sell orders at the bid indication prices provided by an advisor, the investor should expect 95% or more of their funds to sell within 2% to 5% of the bid indications under normal market conditions.
Rule Five: Position Yourself To Achieve Optimal Price Executions.
NYPPEX believes that optimal price executions occur when marketing strategies include: 1) proactive marketing, 2) a competitive process, either through a managed auction or first come, first served approach and 3) inviting a limited number of buyers that seek your funds’ profiles.
Rule Six: Consider The Fund’s Adjusted Total Return Upon A Secondary Sale.
NYPPEX believes that some investors lose sight of the overall investment return of the fund being sold. To illustrate this in more detail, if a private equity fund offered for sale has generated an investment multiple of say 1.40x, has only 10% remaining value and the best bid is 90.00 (% of remaining value), an investor should understand that holding out for a slightly higher bid of say 95.00, will not have much impact on the adjusted total return.
Rule Seven: Know Your Responsibilities As A Transferor.
NYPPEX believes investors should understand 1) each fund’s transfer instructions as stated in the partnership agreement and 2) jurisdictions’ tax and securities laws. As an example, a secondary interest transferred in a Swiss based private equity fund of funds incurs a 0.15% Swiss Securities Transfer Tax (“SSTT”), calculated on the buyer’s gross proceeds. A secondary advisor with experience divesting global fund portfolios can assist investors to understand and prepare for these issues.
Rule Eight: Mitigate Settlement Risk After Execution Of Transfer Documents.
NYPPEX believes one of the biggest causes of failed settlements, despite achieving a price match and the parties having executed transfer documents, results when the general partner cannot permit any more secondary interest transfers for the current year because the partnership has no remaining safe-harbor exemptions under IRS Regulation 1.7704.
NYPPEX believes investors should select an advisor with experience as a Qualified Matching Service (“QMS”) as per IRS Regulation 1.7704, which can provide a QMS safe harbor exemption that allows the general partner to permit more secondary interest volume in the current year.
For large portfolio divestitures, NYPPEX believes the advisor should also have a private letter ruling from the IRS which formally recognizes the advisor’s QMS, because transfer documents typically require the investor to assume liability if the partnership incurs an adverse tax consequence that resulted from the investor’s secondary interest transfer.
Conclusion
With these eight principles, NYPPEX seeks to provide qualified investors worldwide a better understanding of the risks and best practices to successfully divest private equity funds.
For further information or to arrange a confidential call, please contact Kelly Londono in client services at NYPPEX: inquiries@nyppex.com or +1 (914) 305-2825.
About NYPPEX Holdings
NYPPEX Holdings operates a global private marketplace that provides the opportunity for qualified investors to access secondary liquidity in alternative investment funds and private companies in a fair and ethical manner.
Its clients include alternative investment funds, financial institutions, endowments, foundations, institutional investors, family offices, private clients and their respective advisors worldwide.
Since 2004, the NYPPEX QMS™ has been formally recognized by the U.S. Internal Revenue Service as a Qualified Matching Service for private partnerships though a private letter ruling under Internal Revenue Code §1.7704.
Its private securities are privately offered only to qualified investors through NYPPEX, LLC and only in jurisdictions were permitted. NYPPEX is regulated in the U.S. by the SEC and FINRA. Member FINRA, SPIC. Copyright 2021 NYPPEX Holdings, LLC. All rights reserved.
Disclosure: Private placements are illiquid, speculative and investors may lose their entire investment.
This commentary is for informational purposes only and only for the addressee specified, which we understand to be a Qualified Purchaser and holder of private equity fund assets. It does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security which may only be done through an issuer’s offering documents and in jurisdictions where permissible. Nothing contained in this email or subsequent document constitutes investment advice or offers any opinion with respect to the suitability of any security. The views expressed on this email and subsequent documents should not be taken as advice to buy, sell or hold any security. In preparing the information contained in this invitation, we have not taken into account the investment needs, objectives and financial circumstances of any particular investor. This information has no regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this information and investments discussed may not be suitable for all investors. Any views expressed on this invitation or subsequent report by NYPPEX were prepared based upon the information available to NYPPEX at the time such views were written. Changed or additional information could cause such views to change. All information is subject to possible correction. Information may quickly become unreliable for various reasons, including changes in market conditions or economic circumstances.
