Ed Gander, London-based co-head of the global private fund group at Weil, Gotshal & Manges, and associate James Bromley explain their take on the difference between a fund restructuring and recapitalisation and whether fundraising GPs should include provisions of structured solutions in their initial fund construction and marketing.
In your view, what are the various steps that define a fund restructuring or recap? Some market participants use terms interchangeably.
Gander: For clarity, I would classify a fund restructuring as some form of change to the original fund agreement – at its most basic, a fund extension and at the more complex end, with some form of adjusted GP/LP economics and potentially the addition or substitution of new fund vehicle(s). I would classify a recapitalisation as a restructuring situation combined with the introduction of fresh capital, either from existing investors, new investors, or both. If the market adopted this distinction in secondaries terminology then I think everyone would find things a lot clearer when market transactions are being described in the press.
What about when a totally new vehicle is created?
Gander: This situation arises when the original fund sells its remaining tail assets into a new fund, usually to be managed by the existing GP. A new fund vehicle will be used to acquire some or all of the assets from the original fund . This occurs in circumstances where it would be unpractical for the GP to obtain the requisite consent from enough LPs in the original fund for a restructuring (or recap), even if a majority were in favour of it. This might be, for instance, because LP unanimity is required to make any material changes to the original fund LPA etc.
Bromley: This situation will also typically involve new investors, both to finance the acquisition of investments from the original fund and, potentially, to provide new capital for follow-ons and/or new investments. This can create conflicts for the GP, especially in the case where the new economic terms have been agreed with the new investors, but not the existing LPs.
How do LPs perceive structured solutions today?
Gander: These transactions, particularly in the so-called ‘zombie’ space can sometimes become emotionally charged: we have seen some LPs become quite frustrated if they are not properly consulted long before any potential transaction is proposed. But good GPs know this and will always keep their investor base fully informed and explain the reasons why they think a restructuring or a recap is in the best interests of both parties. If they are structured and implemented correctly, these transactions should benefit all the participants in them, including any new investors and original investors. And LPs are getting increasingly comfortable as they see the benefits of an increasing number of properly executed structured solutions in the market.
Bromley: A lot of LPs are becoming smarter and more active investors; some sophisticated LPs are even raising questions about a fund restructuring or recap during an initial fundraise, whereas these ‘end of fund life’ questions rarely used to be asked by LPs, if at all.
How are fundraising GPs responding to those questions?
Gander: In many cases it’s premature to consider restructuring or recap options while marketing because the end-of-life dynamic is bespoke to each type of fund. That said, some investors who have been through these processes in recent years are more alive to potential future pitfalls and more attention has been given to LPAC provisions and voting thresholds, for instance. But what is clear is that the increase in structured solutions for real asset funds (ie infrastructure and renewable energy funds etc) has arisen because there has been a fundamental mismatch at the outset between the characteristics and return profile of the fund’s target assets and the legal structure overlaid on top. With hindsight, many of the situations currently faced by GPs with infrastructure funds nearing end of life could have been mitigated if they had had a different legal structure. That is something we spend a lot of time on now. We advise managers on the launch of their new products: matching structures with strategies is the key.