Inside RFE’s GP-Led Structured Secondary with ZRG: Structure, Investor Mix & Strategic Implications

The transaction led by Timber Bay Partners marks a growing trend of GP-led structured secondaries as private equity firms seek liquidity and capital flexibility without relinquishing control or ownership. In this instance, RFE Investment Partners orchestrated a single-asset GP-led recapitalization of ZRG Partners, supported by a combination of preferred equity from institutions including Apogem, Headlands, and Morningside, alongside a senior credit facility via Truist Bank. The use of preferred equity allowed LPs to receive a return of their original cost basis, with some reinvesting in the new vehicle, while RFE maintained control of the underlying business.

Structurally, this deal reflects several key design choices emblematic of modern secondaries: the alignment of LPs via the vehicle setup, control retention by the GP, usage of debt to lever returns, and preferred shares providing a quasi-debt cost of capital. The senior credit facility adds leverage and optionality for growth (including acquisitions, hiring) while the preferred equity distributions allow downside mitigation for LPs.

The June 2024 refinancing/debt raise for $120 million from Main Street Capital further reinforces ZRG’s strategy of growing via M&A and expanding service offerings beyond executive search (e.g. RPO, consulting, interim work). It complements the earlier GP-led recapitalization by providing additional liquidity and flexibility, signaling sustained capital market confidence in ZRG and RFE as sponsors.

Strategically, three implications stand out: first, GPs can increasingly offer structured secondaries to manage LP liquidity, maintain ownership, and align incentives; second, human capital services companies are attractive targets for both growth and roll-up strategies, especially those with data-driven tools; third, preferred equity and layered financing are becoming more accepted in lower middle-market PE for balancing risk and funding needs. However, open questions remain: what was the cost of that preferred equity (e.g., dividend rates, liquidation preferences), how was ZRG valued in the transaction (pre- and post-money), how much dilution did reinvestment by LPs cause, and what exit options are being preserved?