In response to the increasing prevalence of general partner (GP)-led secondary fund restructurings, the Institutional Limited Partners Association (ILPA) has released guidance regarding this practice. The purpose of this guidance is to promote transparency and efficiency in the secondary process.

The ILPA has defined these restructurings as transactions that offer one of the following:

  • The option to achieve full or partial liquidity with respect to a fund interest so that a limited partner may actively manage its portfolio (for limited partners (LPs))
  • The opportunity to secure additional time or capital to maximize the value of the remaining assets or to lock in results in anticipation of a fundraising (for GPs)

In the restructuring, the target fund enters into an agreement with an acquirer to purchase a “significant portion” of the assets of the target fund. The LP has the option to sell their interest, roll their pro rata share or receive a combination of those two options. The roll option is, de facto, an exchange of existing interests in the target fund for interests in a special purpose vehicle formed to purchase the assets of the target fund.

While the transaction has historically been stigmatized due to its use to support “zombie funds,” its use in recent years has become more common in the private equity industry, and more oriented toward solutions such as providing liquidity for LPs or securing a preemptive extension to maximize the value of a fund’s assets.

The ILPA issued specific recommendations on:

  • LP engagement and the role of the LP advisory committee (LPAC). The rationale for the fund restructuring should be shared with the LPAC (and potentially a broader subset of all limited partners) as soon as possible, before a formal proposal is submitted. If it is an “end of life” scenario, the lead time should be no less than six months prior to the expiration of the term of the fund. If the GP may receive a benefit that does not accrue to LPs, this conflict should be identified, mitigated where possible and approved by the LPAC.
  • Adequate disclosures of information. The LPAC should have enough information to assess whether the GP-led process was appropriate to secure a fair price. For instance, how were bids solicited and were there any factors that would have excluded certain acquirers.
  • Timing and structure of a well-run process. LPs should have no less than 30 calendar days or 20 business days to evaluate the GP proposal and make their elections.
  • Allocation of fees and expenses. Fees and expenses should be clearly disclosed to all LPs, as well as adequate disclosure of the implications associated with the “status quo” option (e.g., will the status quo option be treated as an election to continue to participate in the fund with no change in economic terms or will it be treated as an election to sell).
  • The role of third-party advisers. Here, too, any potential conflicts should be disclosed to all LPs, and the LPAC should review the selection process, adviser’s role, scope of services and fee arrangement.
  • Steps for LPs to take when engaging in a GP-led process. The ILPA also proposed six steps that LPs should take in this circumstance which included initiating an internal discussion within the LP’s organization, reviewing the full scope of documentation with respect to such transaction (both new and existing fund documents), obtaining advice on ERISA obligations to the extent the LP is subject to ERISA obligations, setting timing expectations with the GP as early as possible in the transaction and conducting due diligence on the deal offered to them by the GP.

The ILPA acknowledged that secondary fund restructurings are used in a large variety of deals, such that the recommendations might not be universally appropriate for or applicable to every circumstance. Instead, the recommendations provide general parameters to encourage productive dialogue among stakeholders.