The Institutional Limited Partners Association is a force to be reckoned with. The industry body issues guidance on various topics, including its private equity principles, to around 450 member institutions representing more than $2 trillion in private equity assets.
ILPA’s upcoming guidance on GP-led restructurings, as we reported last week, couldn’t come at a better time: such deals account for as much as 26 percent of secondaries deal volume. Here are five things we can expect from ILPA’s guidelines, to be published as early as the end of the year:
1 ILPA wants to get it right
While the body is keen to issue guidance on an increasingly common and important issue, it doesn’t want to rush into providing guidelines that don’t make sense to industry practitioners. “With the GP-led transactions, every deal’s a snowflake,” ILPA’s managing director of industry affairs Jennifer Choi told us. The association is aware that different nuances in each transaction can make issuing boilerplate guidance tricky.
“The true north for us is: would a reasonable rational market participant feel like this sounds right in the context of alignment in the partnership?” Choi said.
2 Guidance will be limited to restructurings … for now
ILPA won’t issue guidance on other processes, such as stapled deals or broader end-of-life fund issues, the latter of which Choi describes as “fairly specific” to each case. Still, ILPA views restructurings within the context of a fund coming to the end of its term, in most cases, and it wants to help remove ambiguity over fund extensions or fees charged at the end of a vehicle’s term.
3 Reducing conflicts of interest will be key
If there’s one issue secondaries-focused lawyers constantly highlight as the biggest concern when it comes to GP-led restructurings, it is reducing conflicts of interest. Expect ILPA’s guidance to outline how LPs can push for better market testing for pricing on assets, the involvement of an intermediary, as well as ‘full and frank’ disclosure from GPs.
The guidance is also likely to recommend that fairness opinions be sought on valuations and prospective deals, though their importance may depend on the circumstances of each deal.
“How often does a fairness opinion diverge from whatever has been recommended on the deal?” Choi said. “It may be that the value of a fairness opinion really depends on the circumstances.”
4 Expect to get into the weeds
ILPA’s 2017 guidance on subscription credit lines is a five-page document covering GP clawback, fees and expenses, tax considerations and legal risks, among other issues. It provides LPs with nine recommendations (including LPAC-specific guidance) on the topic and lists 15 example questions so LPs can grill their GPs on issues ranging from terms to costs, how the fund facility will affect the fund’s performance, as well as regulatory and tax concerns.
It’s likely that ILPA will issue similarly thorough guidance when it comes to restructurings. GPs, and more importantly their advisors, should be prepared to answer highly specific questions from their LPs, all in the name of greater transparency and reducing potential conflicts of interest.
5 Nothing is set in stone
ILPA understands the secondaries market evolves quickly, so it is open to updating its guidance where necessary. Its recommendations on subscription credit lines calls for continuous member feedback so it can reflect “new market conditions”; expect the LP body to be receptive to ongoing suggestions from all segments of the industry.