CaseMark Conducting Secondary Due Diligence
Structures buy-side DD for secondary transactions — LP interest purchases, GP-led continuations, strip sales, and structured secondaries — covering underlying fund analysis, manager assessment, and portfolio-level risk evaluation.
When To Use
- Evaluating an LP portfolio or single fund interest offered on the secondary market
- Conducting buy-side DD on a GP-led continuation vehicle or tender offer
- Assessing a manager's track record and operational infrastructure before committing capital
- Building an investment memo for an IC submission on a secondary transaction
- Stress-testing NAV marks and pricing assumptions prior to bid submission
Inputs To Gather
- Fund documents: LPA (including amendments/side letters), PPM, subscription agreements, financial statements (audited), capital account statements
- GP materials: quarterly reports, annual meeting presentations, co-investment track record, prior fund performance data (DPI, TVPI, IRR by vintage)
- Portfolio company data: revenue/EBITDA schedules, cap tables, board decks, management financials (if available via data room)
- Transaction specifics: seller's ask price, transfer restrictions, ROFR/consent provisions, stapled commitment obligations, any escrow or holdback terms
- Market context: recent secondary pricing benchmarks (e.g., Greenhill, Jefferies secondary market reports), comparable fund multiples, relevant sector indices
Workflow
Scope the transaction structure
- Classify as LP interest, GP-led (single-asset vs. multi-asset continuation), strip sale, or preferred equity
- Identify whether the transfer triggers ROFR, requires GP consent, or involves tag-along/drag-along rights [VERIFY against LPA]
- Map stapled commitments, unfunded obligations, and any management fee offsets
Assess the GP/manager
- Evaluate track record across prior funds: net IRR, DPI, TVPI, loss ratios by vintage
- Analyze team stability — key person departures, succession planning, compensation structure
- Review operational infrastructure: fund admin, auditor, legal counsel, compliance framework
- Check for any regulatory actions, litigation, or LP disputes [VERIFY via ADV filings and public records]
- For GP-led transactions, assess alignment and potential conflicts (carry crystallization, fee resets, rollover percentage)
Analyze underlying portfolio
- Obtain and scrub the latest NAV report; reconcile GP-reported NAV against audited financials
- For each material holding (typically top 10–15 positions by NAV weight):
- Review revenue growth, EBITDA margins, leverage (net debt/EBITDA), and cash flow trajectory
- Assess entry multiples vs. current marks vs. comparable public/private multiples
- Identify exit pathway and expected timing (IPO, strategic sale, sponsor-to-sponsor, dividend recap)
- Flag concentration risk: single-position NAV weight >20%, sector clustering, geographic overlap
- Evaluate foreign currency exposure and hedging posture
Model pricing and returns
- Build a bottom-up NAV model using company-level assumptions (exit multiples, hold periods, growth rates)
- Derive a bid price as a % of NAV; sensitize to downside cases (–20% NAV markdown, 12-month exit delay)
- Calculate projected gross/net IRR and MOIC at bid price under base, upside, and stress scenarios
- Factor in J-curve dynamics: unfunded commitments draw schedule vs. distribution timing
- Compare risk-adjusted returns to alternative deployment (primary commitments, co-investments, direct secondaries)
Evaluate legal and structural risks
- Review transfer provisions in the LPA: consent mechanics, timing, permitted transferee definitions [VERIFY]
- Identify tax structuring considerations: UBTI exposure for tax-exempt buyers, withholding obligations, blocker structures
- Assess indemnification scope in the purchase agreement — representations on NAV, known liabilities, pending litigation
- For GP-led deals, review the continuation vehicle LPA terms: fee/carry step-up, LP advisory committee composition, liquidity options
Compile DD findings and recommendation
- Summarize key risks with severity ratings (high/medium/low) and mitigants
- Present pricing recommendation with supporting sensitivity tables
- Highlight open items requiring GP clarification or additional data room access
- Draft the IC memo sections: transaction overview, manager assessment, portfolio analysis, pricing rationale, risk factors
Output
- DD Summary Memo: Structured findings organized by manager, portfolio, pricing, and legal/structural sections
- NAV Bridge / Pricing Model: Bottom-up build with scenario analysis and sensitivity tables
- Risk Matrix: Itemized risks (manager, portfolio, structural, market) with likelihood, impact, and mitigants
- IC Recommendation: Go/no-go with proposed bid range, key conditions, and post-closing monitoring triggers
Quality Checks
- NAV figures reconcile between GP quarterly reports and audited financials; discrepancies are flagged
- Track record metrics (IRR, DPI, TVPI) are sourced from audited data, not GP marketing materials
- Every assumption in the pricing model has a stated basis (comparable, management guidance, or historical trend)
- Transfer mechanics and consent requirements are confirmed against the actual LPA, not summaries [VERIFY]
- Conflict-of-interest analysis is completed for GP-led transactions (fee economics, rollover terms, information asymmetry)
- All [VERIFY] items are tracked in an open-items log with assigned owners and deadlines
- Tax structuring review covers buyer-specific considerations (tax-exempt, non-US, fund-of-funds) [VERIFY with tax counsel]