The Institutional Limited Partners Association has issued its first best practices guidance on GP-led secondaries, a sub-sector of private markets worth at least $24 billion in annual deal volume and growing.
The LP body, which represents more than $2 trillion in private equity assets under management, on Thursday published its GP-led Secondary Fund Restructurings: Considerations for Limited and General Partners. The document covers LP engagement, the role of the LPAC, disclosures, fees and expenses, the role of advisors, notification periods and recommendations for LPs, among other areas.
“The GP-led secondary process can offer significant benefits to both general and limited partners in terms of portfolio management, liquidity and value creation towards the end of the life of a fund,” said Steve Nelson, ILPA’s chief executive. Establishing a common set of expectations regarding communications, timelines and access to information is critical as these types of deals grow, he added.
GP-led secondaries including fund restructurings grew by 71 percent year-on-year by deal value last year, according to advisor Greenhill. Sponsors overtook pensions and sovereign wealth funds to become the largest seller type last year as they sought to proactively manage their portfolios.
The growth of fund restructurings has been rife with opportunities for potential conflicts of interest, with concerns around LP rights center stage.
“While the stigma associated with such deals has diminished, their increasing prevalence raises questions for many LPs,” the guidance noted. “Such transactions require the limited partner’s full attention, but the timing of the process is often difficult to predict and is therefore potentially disruptive for LPs, particularly when multiple deals overlap.”
ILPA’s recommendations seeks to help create alignment between GPs and LPs and to allow LPs to act in the best interest of their beneficiaries, Nelson said.
The guidance outlines six stages of a GP-led fund restructuring and recommends GPs disclose details around discounted pricing to LPs. It suggests GPs should provide a “status quo” option in which an LP can participate in rolling over its fund interest into a continuation fund with no change in economic terms.
GPs should give LPs no less than 30 calendar days or 20 business days to decide whether to participate in a fund restructuring. Transaction-related expenses should also be capped or be reasonable for LPs who choose to roll over their interests into a continuation fund.
At a breakfast seminar in London on Wednesday, Michael Schad, head of investment management at Coller Capital, said ILPA’s guidelines would be a positive for all parties involved in GP-led deals.
“Oversight is a good thing because everyone knows what is happening makes sense, and then you find a good equilibrium,” he said. LPs will only sell if they are satisfied with the price they receive, he added.
Schad said that as the GP-led secondaries market develops, LPs should think about the amount of resources they are able to dedicate to responding to such processes.
“Twenty years ago, private equity was a market where you just put some money in a fund of funds and then that was it. That market is now different,” he said. “As an LP, you have to tailor your investment strategy accordingly. What do you really want to do in that market? As the market evolves, I think investors have to adjust their investment strategies to a certain degree.”
On information asymmetry in GP-led deals, Louise Boothby, a partner responsible for origination and execution at Coller, said a situation where buyers think they have more information about an asset than LPs could lead to misalignment.
“Coller Capital never aims to buy from investors because we feel we know more than they do,” she said. “We have a different risk appetite and investment horizon in how we’re constructing our fund.”
Ackneil Muldrow, a partner at law firm Akin Gump Strauss Hauer & Feld who contributed to the guidance, told sister publication Private Equity International that the guidelines will level the playing field.
“It will further clarify what’s reasonable, ie, what is something right down the middle versus what is more aggressive that a GP or buyer may be pursuing,” he said.
GPs themselves stand to benefit most from ILPA’s guidance, Muldrow added.
“LPs, because they tend to invest in multiple private equity vehicles, have probably seen one or two of these before so it’s not surprising for them. But for the GP who has never done one of these, it’s virgin territory,” he said.
“This will be very helpful to the GP as to how it should approach its LPs, how it should approach its LPAC and it may facilitate the transaction.”
Organizations including Adam Street Partners, Campbell Lutyens, Canada Pension Plan Investment Board, Greenhill, Houlihan Lokey, ICG, Rede Partners and Morningside Capital contributed to the guidance.
Download ILPA’s guidance here.