Institutional Limited Partners Association on Thursday released guidance regarding general partner-led private equity fund restructurings.
The new guidance includes recommendations that deals resulting in fund-level liquidity for limited partners be transparent and efficient. It also suggests that general partners inform limited partners as early as possible, providing them the rationale for the restructuring and any alternatives considered. General partners should give LPs enough time to fully consider the terms of the transaction, the effect of changes in economic terms and the potential dilution of LPs' interest when the buyers invest follow-on capital.
The guidance also recommends that LPs should receive detailed disclosures on the terms of the new entity or fund created by the restructuring, particularly if there are different terms for new and existing LPs.
"No longer solely the domain of challenged franchises or so-called 'zombie funds,' GP-led secondary fund restructuring transactions are becoming more common in the private equity industry, and more oriented towards solutions such as providing liquidity for limited partners or securing a pre-emptive extension of the fund term to maximize the value of a fund's assets," the guidance states.
GP-led secondary private equity fund transactions are challenging for limited partners because of unpredictable timing, the guidance states. The transactions are tailored for that particular deal, making it difficult for LPs to evaluate the impact of an election to buy, sell or hold, ILPA stated in the guidance. What's more, GP-led secondary transactions can have conflicts of interest, particularly where the benefits of the deal accrue mainly to parties other than the current limited partners. Also, the degree of transparency varies because they are generally not part of limited partnership agreements.
The guidance will also be included as part of the ILPA Principles 3.0 document, set for release later in the second quarter of 2019.