LP Defaults and GP led fund restructuring, Mark Diamond & Geoffrey Perusse

We're both partners at Ramone Law, and our practice is focused around private funds formation, investment matters. Today we're going to be talking a little about LP defaults and GP-led secondary transactions. You know, in light of the COVID-19 pandemic, we're seeing kind of On the LP default side, we're already starting to see some LP defaults. We're fielding questions from fund managers about them, and we thought it would be a useful discussion. GP-led secondaries, which we'll get into, we think will likely rise kind of as a follow-on effect of the financial results of the COVID-19 pandemic. But they've been continuing to grow just as an independent transaction structure anyway. So it's probably worth— even if they don't increase, they are at high levels already. So we'll talk about that. All right. So let me— moving on to our agenda. So this— we'll kind of start with the LP capital call default and move through GP-led restructuring. Talking about how they've kind of evolved over time and then how market trends, how people are approaching those types of transactions. So on LP capital call defaults, we're already seeing, you know, both anecdotally as well as by other practitioners and participants in the market, some increase in LP defaults. On our clients' bonds. They've been relatively, luckily, relatively small in number, but they have occurred. We've also heard some larger, too-large European pension plans recently defaulted on their capital contribution obligations to a private equity, not our client, but we heard through the grapevine about that. And this obviously can happen in downturns for a variety of reasons. Right now, I think their GPs are actually calling capital maybe earlier than they would have otherwise called capital for deals. At the same time, the LPs are receiving less distribution from their existing funds. And And concurrently, especially with institutional LPs, they may now be overweight to private markets because there was a reduction in the public market pricing. So as a result, there's kind of a perfect storm of sorts that made the LP default. So generally, the remedies for an LP default is found in the LP agreement. Typically those remedies include items like you can accept the late contribution with some interest, you can terminate partner's right to participate in future investments, you can loan the money to the defaulting partner at a penalty interest rate, you can have a forced redemption at a discount to fair market value, or in some cases the balance of their capital account. Sometimes that forced redemption, or even a third-party sale to one or more persons, can be financed with a note that either pays nominal or no interest until the end of the term of the fund, as well as, as kind of your standard breach of contract remedies that you may have, that the GP may have available at law or disparate equity. So the, the, the, these are remedies are typically not exclusive, so you can choose one or more. They can be cumulative. And so some of the, the questions we get in interpreting these have been, you know, this is kind of questions we've gotten over the last a few weeks. One was, can you distinguish between LPs in choosing your options? So if you have, you know, similarly situated LPs, can you choose different options? Or if you have different LPs that you think have, you know, fit into different types of buckets, can you choose different options? And I think the answer is generally yes. The contractual terms themselves permit, typically permit the general partner to make the decision in its sole discretion. So, but we would note that one of the key considerations that the GP has to take into account is its fiduciary duty issues. As many of you know, in the US, the general partner is an investment advisor, as an investment advisor, its client, in this case the fund, a fiduciary duty to act in its best interest, as well as an affirmative duty of care and loyalty. So where the general partner is accommodating an investor, uh, for reasons that don't relate to the benefit of the fund, for example they want to secure commitment for a future unrelated fund, or they want to manage a client relationship for other purposes, it may be unlikely to be a legitimate basis to draw a distinction. So care needs to be thought through why the general partner is making a determination and really should focus on maximizing the benefits for for the fund as a whole.

Jeff, just one little interjection.

Yeah.

It's, this is a situation where you have to consider conflicts of interest as well because the investor who's defaulting may have some relationship with the general partner or may have some other investments with the related fund complex that would encourage the general partner to give them a better deal, so to speak, than to an unaffiliated person. So, you know, this is just another place to look out for conflicts.

Yeah, and I think on that note, it's just making sure you have some rationale that's, you know, documented at the time, that you've thought through, that's reasonable in making a determination. And, you know, we One of the ways that, that, you know, we think about this sometimes is really finding out why the LP didn't— wasn't able to make a capital call. Did they have, you know, for example, is it a temporary issue because they don't have, you know, liquid resources, or is it a more permanent issue? Do they just not want to contribute to this? Vehicle because they had other commitments. And so, you know, finding out, I think, a little bit more about the failure to commit, if you can, or contribute, can help guide that. You know, we have found that in this— in the defaults that we've been dealing with, mostly it was a situation where we had a rapid drawdown in the prices of the security markets. While the LP was liquid, you know, relatively liquid in other securities and had the funds available, they really didn't want to draw down at a time when the markets were viewed as being depressed. And so there was some reluctance to contribute. And that's a different situation than, for example, a vehicle or an LP which just simply doesn't have the money went bankrupt, went out of business, or otherwise it has decided not to be able, or it's unwilling to contribute to this fund. We've asked other, another question we had was, can you, could you give an LP a choice of its structure as a remedy? And I don't, you know, our general thought on that is it's not a good idea. The GP has discretion to make a decision, you know, subject to his fiduciary duty issues. It certainly can discuss with an LP the potential outcome, but I think that ultimately the decision should be with the GP. It has an obligation under the fiduciary duty obligations to, you know, as an affirmative duty of care and and loyalty as part of fiduciary duty obligation. So I think giving up that, you know, the ability to make a decision in that case is not a great idea, but that's true to get the input of the LP. And I would just on this point, you know, in the construct of the current environment for particularly for funds that are newly raised. I mean, obviously, if you just raised the fund and you're holding your closings now, you're in a pretty good position. Asset prices are likely at some discount to where they were 6 months ago, 5 months ago. And that's a good thing. But I think making a— figuring out if you have any risk here in advance, particularly if you're expecting to execute a large transaction, would be helpful. And maybe this is just like a normal communication with your LPs to find— to make sure that they're still in a position to fund when called, that they don't need additional time. Those types of things could be helpful. Obviously, if you, you know, if it's not a good outcome, it's if you're making a call to buy to buy something and you're unable to kind of get the necessary capital. You know, 1 or 2 defaults minor is one thing. Obviously, if you have a substantial amount of defaults, it creates a whole host of follow-on issues about, you know, execution ability. So I think the managers are good, you know, it would be helpful for them to consider what, you know, who are their LPs, have communications with some of the large ones to make sure that they're still in a position to fund and that they have interest and capacity to fund in the kind of timeframes that were agreed to in the agreement. It may be that, given the circumstances, that your call time might have to be longer than what was originally anticipated. Mark, anything else on this before we move on?

Just that this kind of overlaps with our other discussion coming up about restructurings, but sometimes the limited partnership agreement provides for right of first refusal provision in the event of a default by the limited partner, which could trigger a procedure for offering that limited partner's interest to other limited partners, the ones who have not defaulted. And, you know, it'll go through that process. Whereas, as we'll discuss in the later part of this webinar, there may be other customized approaches that would be better than following what's in the limited partnership agreement in that situation. You may not want to exercise that remedy.

Yeah, that's right. I mean, I think it's a good point that you can move to a secondary transaction, particularly if the assets are strong and the manager is fairly well known and the size and scope of the fund is large enough. There are a number of secondary shops out there with buyers for kind of interest in high-grade funds at a discount. So that often is, you know, if this is going to be a real problem moving forward, one of the better remedies is kind of arranging for a secondary transaction of LP interest. And so you have an LP that actually can contribute when called.

Hey, Jeff.

Uh, yeah, let me pop in real quick.

Uh, you're showing your presenter view, so you might want to minimize that.

Oh, sorry, drop it down. There you go. Back on the other one.

Yep, back on the other one.

Okay. Um, okay, uh, so, uh, talking about the GP-led restructuring So GP-led restructuring kind of have a pretty large pool of types of transactions that I'm referring to now. But when they originally started, the concept was really created out of the last financial crisis. Fund managers raised capital, you know, prior to 2008. Were finding that they had bought assets and sometime around 2013, 2014, they had funds that were at the end of their investment term, but asset prices were still depressed to some degree. And so there really was a disconnect between what the GPs believed the value of the assets were or should be and what they were able to get in the market. And a lot of these assets, the GPs believe were fundamentally good assets, but they essentially needed more time. So, but there was a tension, right? Because some of the LPs wanted liquidity. They said, look, we signed up only for a certain amount of time and they wanted out while the GP didn't want to crystallize their performance and carry at a depressed price. And so GP-led restructurings were essentially a way to give some liquidity to the LPs while allowing the GP more time to facilitate a sale at a higher price. These have grown quite a bit. Estimates are somewhere between 35% and 50% of the secondary market in in 2020. The secondary, I think, was about $90 billion last year. So this is a substantial size now. As we'll talk about a little bit here, there's been a lot of evolution in this market in terms of structures that allowed the size to grow. And there's been a fairly widespread adoption of GP-led restructurings. You know, in the beginning when these were first happening, they were, you know, because of the nature of the sales, they were still, they were looked at as an option to avoid if you could. And managers that were engaged in them were seen as essentially being weaker or not having made a successful investment. And the types of investors that were participating were really looking for discounts to what, you know, fair market value was, right? So they wanted to come into distressed assets. Those are the types of investors that were participating in the secondary market. However, as it grew and as more and more, you know, I think as the industry developed, a lot of the terms became more accepted. The pool of buyers that were participating were stronger, were not necessarily looking at these interests in the secondary market to be distressed. And so it moved into really as another option for managers to consider when they were looking to sell fund assets at the end of its term. So in the— in kind of structure, we really started off with LP tender offers. And the LP tender offer structure was— here we go— what is a transaction where you have to say, secondary buyer essentially offering to all the limited partners to buy their interest. And in that type of transaction, what would happen is that the no option, right, so if a limited partner wants to continue or wants to cash out, it needs to opt to cash out. I mean, it takes affirmative action to cash out. And what people were finding was that the uptake and take-up in that option was somewhere between 30% and 45% of the LPs would typically be willing to tender. However, the secondary buyer had to put in substantial amount of work, you know, valuing the assets, structuring the deal, doing due diligence, legal costs, with no assurance that the deal would actually happen. And so there were kind of— as that occurred, new structures were considered as a way to make it more certain, to add certainty to the transaction. So basically, what— I mean, there's a variety of ways these are now structured, but one way is that you have a new fund, right, which is capitalized by a secondary, a new investor, a new LP. And then you have a sale from a merger, really, or sale of the assets from the old fund. One or more of the assets from the old fund which move into a new fund. So the continuation vehicle essentially is a new partnership with some of which may have new terms or different terms, including a longer term. There may be different carry or management fees. But they're— but it's still managed by the same general partner. And essentially the new fund would then buy some or all of the assets from the old fund. And so this, this type of transaction has the— essentially the reverse, right? So if an LP does nothing in this type of recap, it will receive cash. So the default option is that you're kind of cashing out typically. And so as a result, there's been significant more uptake. And I think estimates now are somewhere between, you know, 50% and 60% of the old LPs in these types of recap transactions will elect to take cash. And so the market has, I think, moved in that direction. We've also seen kind of similar structures with single asset deals, right, where you have a secondary— instead of creating a new fund, there's just one asset that they're going to move out of the fund and they'll sell it to another partnership which will buy just that one asset and we'll recap it or have new additional capital coming in, both to maybe provide additional follow-on equity for the investment strategy as well as to provide liquidity to LPs that don't want to continue.

Is that used primarily in situations where the asset is not deemed to be right for sale and has still some potential appreciation to it.

Sure. Yeah, that's one reason. Also, I think a lot of times this is for bolt-on acquisitions, right? So you have a business that the manager believes would have some additional value by acquiring new companies, and it needs to raise additional capital to to execute that strategy. One way of doing that is to create a single asset vehicle with new access to new capital, which then can go out and execute the business plan of bolt-on acquisitions, right? And the other, you know, there's also kind of multi-fund roll-ups. We worked on a transaction, or I worked on a transaction a while ago where we took multiple funds, sold it to a new investor, who was also— the multi-funds were now still managed by the same general partner. And also the new general partner— sorry, the manager received an investment in the management company and also got a commitment in the new fund. So kind of these recaps can have a variety of different pieces to them. And sometimes they're all conditioned upon other pieces coming together. So it can be a fairly complicated transaction. The other thing that's kind of a newer innovation is this preferred equity strategy, which which is where you have new equity, new capital that comes into an existing fund. And in that case, the preferred equity will essentially come at the top of the capital stack, right? So they'll get preferred return on the equity, usually not 100% of the proceeds, but a higher percentage of proceeds will go to the preferred equity until they receive their capital back and preferred return. Split and the old investors will get a larger percentage and the third equity will continue to participate but at a lower hurdle rate. You know, this can be used in a lot of situations where, again, maybe the valuation of the assets don't— really don't allow for additional debt to be placed on it, but maybe there's some additional capital that's needed. And maybe at this point the risk is lower. So it can provide kind of an additional capital influx into the fund without calling, you know, capital from the existing LPs or requiring the LPs to contribute more capital.

Jeff, maybe this is a good time to mention what happens to the existing LPs. That wanna continue to participate. Basically what they're doing is exchanging their old LP interest in the old fund for an LP interest in the new fund. And those are not necessarily apples-to-apples exchanges. The new fund may have provisions or attributes that are different from the old fund in terms of management fees, carry, any other types of variables. And the LP would have to consider whether the terms are suitable. And those terms can be different from the preferred equity terms, as you mentioned.

Yeah, right. Yeah, I think that's a good point. And, you know, I think the— we're gonna— As we get through the conflict of interest, there is— these are very interesting transactions from a legal perspective because essentially when you're structuring them, the GP is on both sides of the deal. And so there are a number of conflicts that arise in these as a result of that. And so it's important important to kind of consider all those conflicts and get the process right because, you know, the SEC in particular is looking at these types of transactions. There has been some, I think one enforcement action about a year and a half ago on disclosure issues around this type of transaction. But it really is the if you're considering this type of transaction, to involve your legal advisor early to help structure it appropriately. The process is really important here, more so than in a typical deal. So, you know, we could I guess we should get into it. We can get into the conflict issues. As I think we mentioned earlier, under the Investment Advisors Act, there's a statutory fiduciary duty on a general partner to a fund. The fund is treated as a client, as most people know, and the GP has an unwavable fiduciary duty fiduciary duty to its client. And as a result of that, it really has to, you know, and also the GP, I should mention, would have fiduciary duties to the new fund as a sponsor of the continuation vehicle. So where you have these transactions, whether you're selling one asset into, you know, into a new fund, or whether you're doing a whole fund sale or a multi-fund roll-up or staple transaction where you're selling, providing some liquidity in exchange for a commitment to a new fund, or variations of all these, you really have to think through the conflicts. And the biggest conflict obviously is the selling price. Obviously, there's kind of incentives, I guess, financial incentives for the general partner that flow both ways. On the one hand, depending on where the carry is and how the rest of the fund, the old fund, is done, this might be an opportunity to crystallize carry, right, to de-risk it or to minimize any clawback. So, and there's an incentive, the general partner has an incentive to maximize price with respect to the selling fund. And on the new fund and the continuation vehicle side, Usually the carry is kind of determined in part on price of the assets that are being acquired. So ultimately, the general partner has an interest to have a lower price or the lowest price available. And so in this case, By the way, those conflicts don't, you know, don't cancel themselves out. You have to deal with both separately. And so the way most conflicts— and there's other conflicts too, right? For example, there might be a conflict to, you know, on extending a term or creating a new management cash flow stream. Creating new carry for new employees to incentivize them, creating longer preferential relations with LPs, releasing pressures to distribute funds from existing LPs, and then to a certain extent, depending, you know, on what you're doing, how to handle the allocation of expenses. So The main way that conflicts are dealt with is through consent of the LPAC. And, well, disclosure and consent with LPAC, right? So it's important early in the process to make sure that there is an LPAC, that it's properly constituted, that the limited partner agreement both provides for one as well as makes it clear contractually that it has the ability to clear conflicts under the statutory, under the documents. To the extent that that doesn't exist or that the limited partnership agreement doesn't either allow for an LPAC or doesn't have a proper structure in place, then some consideration needs to be made on how you're going to do this. Because typically the LPAC is the main— or whether you can do it at all. The LPAC is the primary way to deal with waiting conflicts in these types of transactions. In theory, you could go to the whole limited partner group as a whole, but there, there's there's some concern about whether or not you would need to get the consent of the majority of the adversely affected LPs. So it becomes more challenging. So I mean, I think, and the way— I mean, first of all, one of the key things in waiving and dealing with conflicts is disclosure. Disclosure, right? So you want to make sure that, that you disclose all the material facts about the conflict. And not just the material facts about the conflict, but, you know, because the LPAC is providing such a key— is playing such a key role in these transactions, making sure that they have early access to valuation, to underlying due diligence on the assets being sold, to process how many people you solicited for as buyers, who whether those people had any conflicts. Do you have— have you engaged a third party to participate in this process? So giving the LPAC disclosure, ideally the LPAC has, you know, the ability to hire their own counselors, lawyers, and/or financial advisors. In certain cases, getting a third-party valuation opinion on price is is helpful and can help give some comfort to everyone that the price being paid is fair and reasonable. And just making sure the LPAC is, you know, practically is involved early in the process is important. You know, I think a lot of limited partners are getting more used to these types of transactions and have some skill set around them. On the other hand, not everyone has, and so I think providing them kind of some visibility into this with efficient time and in a way that makes it digestible and easy for them to both understand as well as to give their feedback is an important part of the process. And I think that one, you know, one thing to think about is this, is the ILPA guidance. And I think one of the things is that, you know, it's, I think it's a good sign that ILPA provided guidance. Obviously the watchdog group for the limited partners, institutional limited partners, shows that the, these types of transactions are becoming more standard. And frankly, I think that the guidance they provided is fairly in line with what market practice had been anyway. And so I think it makes some good points that should be considered, you know, many of which we've kind of raised here. And I think, but I think ultimately it shows that these types of transactions are becoming more accepted in the marketplace.

And it's also good to pay attention to what ILPA says since they represent the largest and most important limited partner, institutional limited partners out there. So they have a lot of bargaining clout when it comes to negotiating these things.

Yeah. The other thing to consider, and some of this, you know, you also need to look at the voting transactions, the voting provisions in the fund documents. You know, typically an affirmative vote of the majority of the LPs would be required— is often required to approve the transaction. But there may be appropriate or necessity to have a higher percentage. ILPA recommends that if there's significant conflicts of interest that a two-thirds majority vote may be more appropriate. And those obviously those votes would affiliated to the general partner, such as employees or other related parties. You know, I think that from a market uptake, I'm not sure that that two-thirds majority vote is standard by any means, but it's, you know, something to consider. There's also, I think, been some SEC guidance about the status quo option. So for those limited partners that were electing to roll over rather than sell in a recap transaction, the SEC has kind of provided guidance that in their view, those LPs should be able to participate in the new structure with no change in their economic terms. And And so it is— now that's in the US. You know, I've heard in other jurisdictions, as in Europe, that's not followed. Where in Europe— and part of that has to do with how carry is calculated on, you know, whole fund versus, you know, deal-by-deal carry. The European-style whole fund carry, they often utilize these types of transactions, I think, to crystallize carry and to essentially treat it as a sale, as you would see any other sale, and the distribution of either cash or in-kind for the asset essentially crystallizes in a sale event with respect to those LPs, regardless of what they chose. Whereas In the US, because of these SEC guidance, the typical strategy is that the rollover LPs continue essentially on their prior terms. And so they don't get— they don't have a reset of the carry calculation. Mark, anything else you want to mention? Anything you want to add on that, Fran?

That's actually a good point in terms of what I mentioned earlier, that on the exchange, you know, you'd have to pay attention to the SEC guidelines to determine whether or not you were allowed to offer the rollover limited partners an interest that's different from what they had in the old partnership. And consider to what extent that has to be coordinated or resemble the other remaining interests in the new partnership.

Right. Yeah. Okay. And— I think we're— one of the things I think we'll just mention and go— we'll go over a little bit here is the use of reps and warranty insurance. There has been— oh, actually, before we go there, let's— one thing I did want to mention and talk about was allocating expenses. I'll go back to the last slide here. This really is kind of a conflict issue, and some of it is driven by limited partnership agreements. I mean, often the older limited partnership agreements or in older forms of limited partnership agreements may not have been structured or built in a way that really addresses all of the potential outcomes of these types of transactions. And this falls through a number of different areas, including the LPAC kind of provisions, but also one is expense allocation. You know, so there— so in these type of transactions, I tend— we tend to think of them as kind of each— there's multiple transactions kind of happening simultaneously, right? So on the one side, for the continuation fund, you have a fund formation expense related to the drafting limited partnership agreement, negotiation of the commitment, side letter negotiation terms. And so that— those expenses are typically borne by by the buyer or by the fund, the secondary fund, right? So any LPs that continue in a new fund will kind of bear a portion of that, as well as the new LPs that are coming in or new LP that comes into the continuation vehicle. So buying and selling the actual assets, whether it's one asset or multi-assets or a whole fund, really is more like a merger and acquisition, an M&A deal. And so those M&A expenses can be allocated between buyer and seller. You know, and also because the inherent legal conflicts here, we should mention that they're, you know, either separate counsel or or at the very least, if kind of Chinese, different actual lawyers from the same firm who are, you know, have an ethical wall put up is important. And oftentimes just the expenses are allocated based on the advisors to each the buyer and seller for their own expenses. What gets more interesting is how do you allocate expenses between the, you know, within the prior fund for the deal. And there is some movement towards especially allocating expenses for the transaction to those limited partners who just took the liquidity. Now, a lot of the older LPAs don't have an authority to allocate expenses on a no-pro-rata basis, right? And this, by the way, not just a legal— I mean, there's often, especially on larger deals, you may have a broker participation finance, you know, as we talked about, a fairness opinion, expense, things like that. And so how do you deal with that? And, you know, do you need to Can you amend the LPA? Do you need to amend it? Again, if the amendment provision is not clear, sometimes if LPAs that are disadvantaged need to have a majority of those folks agree. So it might be more difficult about, you know, more difficult to amend. And so, you know, ideally, you know, the newer LPAs have some additional language that allow non-pro rata allocation of expenses in specific situations such as this. But in older ones, it might be more difficult, so you may just get a pro rata allocation of those expenses. The other thing to think about in advance here, if you're considering going through this or your client is, is to really think about busted deal expenses in advance, right? Because that tends to be one of the issues that the LPAC, you know, will have— can get into some difficulties with. Like, what is— what should the prior fund— you know, if the deal falls apart for some reason, the prior fund— what should the prior fund's cost be? Which expenses should be allocated to the of the prior fund. And so, you know, you want to get ahead of that in advance of the issue before it comes up and actually raise it with the LPAC and get their input because— and/or agreement to how to deal with busted deal expenses. Because I think it does all— at the end of the day, you don't want to have a fight over busted deal expenses afterwards. So it's better to get ahead of that.

Jeff, would that also involve charging a breakup fee in connection with a potential transaction?

It could. I think if it goes to agreement, right, I think that's potentially, you know, if there was some sort of regulatory approval or there might be market, but we don't really see breakup fee the same kind of way that you would see in like a public M&A deal. The other point on expenses is that it's not uncommon for the buyer, right, for the secondary investor to just take— to ask to have its transaction expenses reimbursed, legal fees, in particular, that is— I'd say it has been agreed to sometimes with obviously appropriate limitations and caps on amounts, and that would be borne by the continuation vehicle. Again, if— or by the GP, but typically by the— the continuation vehicle. And obviously, that's part of the disclosure of fees and expenses that comes part of, you know, becomes part of the role of the LPAC and what's given to the LPs in terms of their information about the transaction. Okay. Uh, well, one of the, the things that has happened more recently is, is the use of reps and warranties insurance. Um, you know, when you think about these, these types of M&A deals where you were selling either whether it's one asset or multiple assets from, from a prior fund to a continuation vehicle, um, there will be a host of representations made by the seller regarding the assets. And the problem is, is that when— after the transaction occurs, the seller vehicle essentially is, you know, the proceeds are liquidated, right? They're— and it's wound up. And so there really isn't an entity with assets left available to stand behind any representations and warranties. And so that, you know, people— I think sometimes people argue that you could, you could go to the look-back provisions in, in the old original fund for LPs that received distributions when there was a liability. But buyers typically don't want to have to, you know, go after disparate group of LPs in order to, to, you know, get an indemnity under the purchase and sale agreement for the asset. And so there was a move to having a holdback where you would, you know, the buyer would hold back in escrow a certain percentage of the deal, 10% or something, and and would, you know, hold it for a year or two to determine whether or not there was any indemnification obligations under the purchase and sale agreement. And if there were, then we would move against the escrow. That has moved towards getting reps and warranty insurance. Obviously, reps and warranty insurance is kind of becoming a larger part of the M&A market as a whole. And it's certainly making its way into the secondary transactions for funds. There is some kind of nuances— Sorry, 10-minute warning. Okay. Sorry, we're getting in here anyway. So it seems to be, you know, there seems to be a line. There really be— Risks and warranty insurance between the fund secondary market and the M&A market is slightly different. I think there's kind of different assumptions and the policies are different. And so, but that's definitely been growing, I think, as these transactions continue. It's a nice solution to the issue. If you can get comfortable, and I think more and more participants are utilizing reps and warranties insurance. The— we talked about the growth of preferred equity. I think just to give you some perspective, you know, I think we— there was about, you know, $40 billion, as I said, last year in secondary transactions. Preferred equity is probably only a couple billion dollars. Last year. So it's still a relatively small piece of the market, but it's grown. It's only 3 or 4 years old and it seems to be growing fairly fast. So I think it's something to keep an eye on. Asset-level leverage. This is kind of a— it's a way to utilize underleveraged assets to provide liquidity and to existing LPs. So this may be where you add leverage at a company level or at a portfolio company level or on an asset and dividend up the proceeds or some of the proceeds. But instead of pro rata distribution to the LPs as you would traditionally do, that you would just allocate some to the LPs that are looking for liquidity, often with a stapled secondary, meaning that you'd have a new LP coming and providing additional capital and at the same time extending term. So there's— it's another source for potential capital. And some of the other things we've seen is the disability of the secondary investors to trigger an event, a distribution or a sale event on the on the assets that they're kind of investing. So they're keeping some additional power as opposed to kind of full continuation of a blind pool fund. Okay. I think that— Mark, do you have anything that you want to add on?

Just as an aside, on the asset level leverage issue, that has been a traditional way for hedge funds to finance liquidity problems in the past when you have a larger than expected amount of redemptions from the fund. Borrowing against the assets has been a traditional way of doing that, or use of derivatives like total return swaps is another way. And this is just, this would be just the closed-end fund equivalent.

Yeah, good point. I think we have a few minutes left for any questions. Thanks everybody for listening. Let me just— we don't have any questions right now, but if anybody has anything they want to ask, we're happy to answer.

Also, you guys, the email tomorrow will have Jeff's contact information as well if you have any follow-up questions. And just a reminder that will go out tomorrow. Keep an eye on your email and then shoot me back your bar state number and we'll have a link to the materials today as well. And I think that should be it unless you guys have anything else to add.

I don't think so. I think we're set. Thank you, everybody, for attending. We appreciate it. Thanks. Uh, give it— feel free to reach out with any questions or you want to discuss a transaction.

All right, thanks for attending, everyone.

You have a good day.