NEW YORK, Sept. 9, 2021 /PRNewswire/ -- 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 DivestingPrivate 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 track 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.
NYPPEX also believes investors should avoid less competitive situations such as when a general partner refers only a few limited partners in the same fund to bid on your interest.
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 price match and 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.
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.
About NYPPEX Holdings NYPPEX Holdings operates a global private marketplace that provides price data and the opportunity for qualified investors to access secondary liquidity in alternative investment funds and in 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 formerly 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: The term "rules" and other information is market commentary by NYPPEX and should not be interpreted as securities regulations, tax or other laws. Investors should not rely on the information in this commentary as the sole basis for making decisions when divesting private equity funds. Investors are strongly encouraged to consult with their own independent advisors regarding the issues discussed in this commentary.
Private placements are illiquid, speculative and investors may lose their entire investment.