New ILPA Guidelines for LPs on GP-led Fund Restructurings

GP-led Fund Restructurings have become an increasingly important part of the private equity secondaries market, accounting for 40% of 2018's US$70 billion secondaries activity according to ILPA. Hogan Lovells is a recognized leader in the fund restructuring marketplace and has been at the forefront of many of the most significant transactions shaping the industry.

With this growth in activity, LPs have become increasingly concerned about various aspects of these complex transactions, particularly with respect to conflicts of interest involving GPs.

In response to the increasing frequency of these transactions and concerns raised by the limited partner community, the Institutional Limited Partners Association (ILPA) has now issued a report setting forth its specific considerations and recommendations for LPs and GPs in connection with GP-led Fund Restructurings. 

Key recommendations

Some of the key recommendations concern:

  • Disclosure - setting out considerations for what information the LPAC and LPs should be provided with to avoid asymmetrical information between buyers, GPs and LPs, particularly as regards:
    • the rationale for the transaction
    • the description of the solicitation process and bids received
    • the terms and economics of the transaction, including a comparison between the continuation vehicle versus the original fund and the potential dilution of LP interest related to follow on capital provided by buyers
    • details on management of conflicts of interest
  • Structure of the process - setting out considerations for how GPs should run an efficient and transparent process, ensuring that (i) LPs are afforded sufficient time to evaluate the transaction and proposals, and (ii) transaction fees and expenses are allocated according to existing fund documents and/or in relation to which parties benefit from the transaction
  • Limited Partner Engagement and Role of LPAC - setting out considerations on how to best engage with the LPAC and Limited Partners, including defining the scope of their role
  • Advisers - setting out considerations for ensuring that the GP and LPAC are appropriately advised throughout the process
  • No response to election: ILPA recommends that LPs who do not respond to an election in time should be treated as electing to participate in the continuation fund with no change in economic terms, rather than treated as electing to sell
  • GP to bear some transaction costs: ILPA recommends that where the GP clearly benefits from either additional fee revenue or through a stapled commitment, the GP should share a portion of transaction costs.

Hogan Lovells view*

As ILPA notes in its report, GP-led Fund Restructurings are becoming increasingly more popular in the market as a means to providing solutions-driven outcomes for private equity fund sponsors and investors. ILPA also correctly points out that the scope of these transactions can vary quite considerably from one deal to another. We agree with these sentiments and believe that ILPA’s emphasis on greater transparency and disclosure will benefit all parties involved in these transactions, regardless of the transaction type or purpose. Indeed, we have seen market “best-practices” trending in this direction as the prevalence of these deals increases, and we expect that trend (aided by the ILPA report) to continue.

* Disclosure: Hogan Lovells represents ILPA.

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