The Institutional Limited Partners Association (ILPA) recently announced new guidance regarding the formation and offering of continuation funds in the context of GP-led secondary transactions.
ILPA, a trade organization that promotes the interests of institutions that invest in private equity funds, noted that the guidelines respond to certain difficulties inherent in GP-led secondary transactions, including their conflicted nature (as GPs are typically on both the buy- and sell-side), their complexity and the rapid timelines on which these transactions often take place.
ILPA had previously promulgated broader guidelines for GP-led secondary transactions in 2019. The prior guidance appears to remain in effect and is generally consistent with the new guidance. However, the new guidance includes more detailed recommendations regarding continuation fund terms and related process points and is somewhat more prescriptive than the prior guidance. Key elements of the new guidance include:
- Continuation fund transactions should maximize value for existing LPs;
- LPACs should formally evaluate conflicts of interest even where LPAs include anticipatory waivers of conflicts;
- LPACs should have at least ten business days to evaluate continuation fund opportunities and should receive disclosure on several enumerated topics (including asset specific information sufficient for due diligence, detailed valuation information, information on potential returns and comparative data and the basis for adviser selection);
- GPs should make themselves and third-party advisers directly available to LPs as they evaluate continuation fund opportunities;
- GPs should undertake a competitive bid process and obtain third-party price validation;
- LPs should always have a “status quo” option to roll, which ILPA defines as an option where there is no increase in substantive management fee or carried interest terms, and carried interest does not crystallize with respect to rollers;
- GPs should apply LPs’ preexisting side letters to continuation funds where relevant; and
- GPs should roll all accrued carried interest with respect to selling LPs into the new fund in almost all cases.
As commentators have noted, certain of these guidelines, including those relating to carried interest rollover and status quo terms, are primarily commercial in nature. Flexibility around these points may be warranted in many circumstances. As in ILPA’s 2019 guidance, the new ILPA guidance also envisions an expansive role for LPACs in evaluating GP-led secondaries transactions that some LPACs may consider to go beyond their scope of responsibility. In these and other respects, the new ILPA guidelines may not be fully applicable in every transaction.
Practice points: The new guidance represents a useful reference point for private equity sponsors, LPs and their counsel in structuring and offering continuation funds. The guidelines’ emphasis on early and comprehensive LPAC and LP involvement is particularly valuable given the speed with which buy-side investors and fund sponsors often wish to proceed in these types of transactions. That said, departures from the guidelines will often be appropriate based on facts and circumstances of specific deals.