The portfolio management, liquidity, and value-creation benefits provided in mature-fund GP-led deals appeal to many LPs. (Photo: Bigstock)
In response to general partner (GP)-sponsored secondary activity growth, in April the Institutional Limited Partners Association (ILPA) released guidance to the industry on these often complex and conflict-prone transactions. Entitled “GP-led Fund Restructurings: Considerations for Limited and General Partners”, ILPA's guidance lays out a framework for GPs and limited partners (LPs) to work towards making the process for these transactions more efficient and transparent.
The portfolio management, liquidity, and value-creation benefits provided in mature-fund GP-led deals appeal to many LPs. Investors want the options—a choice among cash-out, status quo, or a roll and invest alongside the new money alternatives—presented to them to be individually fair and derived from a transparent process. Indeed, ILPA's guidance is largely about process and LP expectations for oversight in GP-led deals. LPs believe that if there is a good process and oversight, they will get transparency and fairness.
ILPA recommends the Limited Partner Advisory Committee (LPAC), and, where relevant, all LPs, (1) gets engaged earlier and has an enhanced oversight role throughout the transaction process; and (2) enlists the help of its own counsel and specialist financial advisor to assist, particularly in GP-led deals that are complex and prone to conflict.
In this regard, ILPA's guidelines offer LPs practical help. Having both independent counsel and an advisor review the transaction, guide the GP, and render to the LPAC advice capable of being provided to all LPs, relieves LPs from the burden of individually having to deeply analyze each complex deal. Resource-constrained LPs now can seek this advisor-led review process, prompting the LPAC to organize itself around its advisors for time-sensitive GP-led processes.
Indeed, the level of assurance LP and pension fiduciaries will obtain from such an independent counsel and adviser review, which can be taken and papered at the investment committee and board of trustees, is a big side benefit of ILPA's guidance. GPs too will undoubtedly recognize the power of harnessing the LP-directed advisor to facilitate the process, coalesce opinion, and demonstrate the equity of the resolution to the sellers.
Some of the key takeaways from ILPA's guidance include the following:
Communication: Early transparency of the deal, economics, symmetry of information between buyer and fund LPs, and timely disclosure of conflicts are critical. Investors should have at least 20 calendar days to review the GP proposal.
Enhanced oversight role of LPACs: While advocating for all LPs, LPACs should be fully aware of potential conflicts and consider engaging an independent advisor to act for all LPs, particularly in complex transactions. The LPAC should be provided with full deal terms at least 10 days before the GP finalizes the letter of intent.
Deal structure: LPs should have the option to maintain status quo. LP consent provided should be contingent on a fairness opinion and upfront disclosure of transaction cost allocations and changes to fund terms.
Third-party advisors: Complexity and conflicts of interest may warrant the engagement of LPAC counsel and an experienced third-party advisor to act on behalf of LPs.
You can read the ILPA guidance here.
Finbarr O'Connor and Gavin Farrell of BRG Alternative Investment Advisory are invited contributors to ILPA's guidance. BRG advises managers, investors, and LPACs on fund restructurings, portfolio asset sales, and mature fund situations. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.
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