In April 2019 the Institutional Limited Partners Association (ILPA)
released guidance on the practice of GP-led secondary fund restructurings. The guidance was developed in response to the rising number of transactions and the bespoke features that typify each fund restructuring deal.
Once the exclusive domain of end-of-life funds or funds challenged by succession and key-person disruption, GP-led secondaries are now a more mainstream option to help deliver solutions to LPs by boosting liquidity, or pre-emptively extending the term of the fund to continue to enhance the value of the fund’s underlying investment assets.
The objective of ILPA’s guidance is to provide an overview of the key features of an effective and efficient process of secondary transactions. A wide range of recommendations are made for both LPs and GPs, many of which fundamentally revolve around fostering open and transparent communication between the parties.
Some of the topics covered in the guide include:
Stages of a GP-led Fund Restructuring – at what point in the process is it best to engage with LPs, selecting and engaging an advisor, LPAC reviews, due diligence processes and preparation of disclosure documentation for LP approval.
Disclosures – symmetrical information for both acquirers and fund LPs, additional disclosures in relation to potential conflicts and financial considerations around discounts and fund economics relating to complex deals.
Structure of the process – timelines to review offer proposal, allocation of fees and expenses, follow-on capital and dilution of LP interests.
Advisors to the transaction – engaging third party advisors, LPAC review of advisor selection process, and independent counsel and specialised advisors to the LPAC.
The expectation is that GP-led restructuring transactions will continue to increase in prominence in years ahead, and the ILPA guidance encourages LPs to initiate internal discussions within their own fund to establish a consistent and comprehensive protocol for working through such transactions when they arise.
GPs are encouraged to follow deal structures and processes that maximise alignment between their interests and those of LPs. For LPs, anticipating how to successfully engage in the process and requesting appropriate disclosures will assist in delivering outcomes that are in the best interests of the beneficiaries of LP funds.
Download the ILPA GP-led Secondary Fund Restructurings Guide