As GP-led restructurings are more common now (as they also raise follow-on funding simultaneously), LPs are being obliged to get involved on both sides – or else the GPs hold them hostage (okay okay, a bit dramatic there).
But it is true and according to Axios, GP-led restructurings have gone mainstream (increasing around 70% in 2018) and they don’t always include the so-called “staple” of a primary fund commitment. This puts LPs, at times, at a disadvantage.
The issue: To dig in a little deeper and the sort of risk it poses to LPs, here’s what a limited partner in a buyout fund told the reporter when a fund manager wanted to lead a restructuring and simultaneously raise a follow-on fund:
The message was basically that limited partners should play ball on both fronts, or else the general partner would effectively stop paying attention to hundreds of millions of sunk capital.Dan Primack – Axios
The big deal?: Even when LPs can “roll” their existing interests into a special purpose vehicle, it can be on less favorable terms than was the initial fund.
The Latest: ILPA, the trade group representing limited partners, published the first-ever guidelines for GP-led restructurings. Here are some excerpts:
- ILPA recommends that “rolling” LPs be allowed to maintain initial fund terms, including on carry and management fees.
- LP advisory committees (LPACs) should have enough time and information to seek independent advice, including fairness opinions. All LPs should also should be allowed to question to GP and/or its advisor.
- LPAC should also have a say on fees, including approval of breakup or termination fees if a deal isn’t consummated
Conclusion: Well whether or not these best practices/guidances notes will be followed is something that we will eventually have to see, but for now the GP-led model is favourable arrangement for many LPs.