The Securities and Exchange Commission’s proposed new rules on GP-led secondaries will subject advisers to additional disclosure requirements about the transactions. Among the new asks? That general partners lay out material business relationships between third parties and their firms. PE firms facing the new requirements should prepare for additional paperwork, while limited partners stand to benefit from additional scrutiny of the relatively obscure transactions.

“GP-led secondaries are conflicted transactions, so [firms] have to find an adviser to protect the investors in those funds, to deconflict the transaction,” says 21-year SEC veteran and Kroll’s head of financial services compliance Ken Joseph. “The additional piece of disclosing the material business relationships between the adviser and the opinion provider is just a disclosure; it’s likely information the investor would want to know to assess the credibility of the third party.”

It’s a disclosure that industry participants call overkill. The transactions often carry third-party fairness opinions to mitigate the risk that general partners will self-deal. Secondary deals are often beyond the scope of limited partner agreements, limiting the transparency of transactions to LPs and potentially creating conflicts of interest. Deals can peg the value of a company to a level designed to inflate performance fees upon a future exit.

But third parties are not inherently neutral. Investment banks and the big-four accounting firms often called upon to render fairness opinions often do more lucrative business for the parties about whom they are expected to render impartial judgment.

“I also think that, to the extent that this disclosure causes advisers in particular to shy away from well-established third-party opinion providers who service across funds, that could be a disadvantage,” Joseph argues. “Because you lose institutional knowledge of how others are handling an asset or asset class. It may lead to a fragmentation of advisors and advice being provided, and a loss of competency.”

The pending regulation is especially relevant since GP-led deal flow is increasingWhitehorse Liquidity Partners’ $4 billion secondary fund closed $1 billion over its target last April. But for all the recent press on the rise in GP-led secondary deals, the surge is a phenomenon best considered alongside its historical lumpiness. After steady growth in aggregate funds raised from 2013 to 2016, capital raises have been choppy, according to data provided by Preqin. Only three funds launched during 2020’s presumably favorable climate for secondary investors.

Brandon Zero