An Overview of Secondary Transactions

Certified public account Kate Merli serves as the chief financial officer of the New York City-based investment and private equity firm New 2nd Capital. She brings a decade of experience in accounting and fund management to her position, which includes extensive work with vendors. Kate Merli and the New 2nd Capital team concentrate on investing in and developing high-potential mid-market companies through customized secondary transactions based on the special situations each potential investment may encounter.

While private equity firms often make new investments through primary transactions, acquired through the issuing company as the seller, they may also find it advantageous to build up value through pursuing secondary transactions. 

In a secondary transaction, an equity firm purchases interest in a fund from an already-existing investor. The price of these assets is negotiated directly between buyer and seller, and the buyer typically agrees to take on any currently-unfunded financial obligations from the seller. The company whose assets are being exchanged typically plays no part in the deal.

Transactions in the secondary capital market can become particularly attractive during periods of market turbulence. In this case, a rush for liquidity often drives many of a fund’s original investors to cash out their interests in a variety of products that may include endowment and pension funds, as well as funds of funds.

An Overview of Common Private Equity Fees

Possessing more than a decade of financial experience, Kate Merli serves as the CFO of New 2nd Capital, a private equity fund based in New York City. Over the course of her career, Kate Merli has gained extensive experience in private equity fund matters.

Private equity funds, investment vehicles composed of investors and the funds they are investing in private companies, have two common fees: management fees and performance fees. Management fees are collected to cover the operating expenses of a private equity firm. These fees ensure that fund managers are compensated for their time and expertise. 

While the exact structure of a management fee depends on each fund’s needs, the average fee is 1.5 percent to 2 percent of the total asset amount. Management fees are assessed regardless of how investments in the fund perform.

Conversely, the performance fee is directly affected by how private equity funds perform. If the fund experiences only losses, performance fees are not charged that year. Many private equity funds adhere to the “2 and 20” fee rule in which a 2-percent management fee and a 20-percent performance fee are charged on the fund’s asset value and profits each year.