GP-leds: Communication from the outset

Early engagement with LPs is critical. “Any transaction must ultimately present a solution for the LPs,” says HarbourVest managing director Rajesh Senapati. “Put another way, if very few LPs would select the option for liquidity, there is no point in pursuing a deal. Open communication from the outset is a must because GPs are ultimately going to require a conflict waiver from LPs to move the assets into the affiliated continuation vehicle.”

Once it has been established that there is sufficient buy-in from LPs to warrant going ahead, close adherence to the Institutional Limited Partners Association’s guidelines is highly recommended, including giving LPs at least 30 calendar days or 20 business days to review proposals and submit election forms. “Time, information symmetry, and transparency would be top of my list for ensuring there are no unexpected roadblocks in a GP-led continuation transaction,” Senapati says.

Debevoise & Plimpton partner John Rife agrees: “Early engagement is crucial. LPs hate it if they feel they are getting jammed with something that is already fully baked when they are engaged. They need time to get their head around the deal before they are asked to waive conflicts. At the same time, these transactions only really make sense if a critical mass want liquidity. By engaging early, you can get a sense of the liquidity demand, while also flushing out any LPs that may have had bad experiences with continuation vehicles in the past and therefore have fundamental objections.”

“Communicate early and often,” says Amyn Hassanally, a partner and global head of private equity secondaries at Pantheon. “GPs that leave their LP consultation until the last minute often suffer blowback, and that can derail closing timelines and create unnecessary tension with investors.”

Addressing differing needs

It is important to note that LP communication in these deals has multiple different dimensions. “In reality, GPs are dealing with a number of different constituencies – new investors, rolling LPs and selling LPs – all coming at the deal from different angles and with different interests,” says Gavin Anderson, a partner at Debevoise & Plimpton. “Tailoring messaging to make sure it works for everyone is key. After all, these transactions almost always need LPAC approval, so it is vital that LPs are kept happy. I have seen situations where that wasn’t the case and it didn’t work out well for anyone.”

Palladium Equity Partners has first-hand experience of the situation, having recently closed a $450 million continuation fund. “We spoke with our major limited partners throughout the process,” Palladium partner and co-head of flagship funds Justin Green explains. “Several gave us good feedback on the pitfalls and challenges that they see in other deals. Being open and transparent with our communication seemed to really help our process. One challenge to communication is that limited partners have different goals and internal requirements. We tried to address that by understanding their needs and creating as much flexibility as possible within the structure.”

One Equity Partners, meanwhile, ran two separate election processes for its $1 billion continuation vehicle: one early on in the deal and one just prior to close. “Companies are not static things, like houses,” says David Lippin, a partner and head of investor relations at the firm. “Situations change. Performance changes. We wanted to make sure everyone had the latest information when making their decision.”

However, Lippin also concedes that it is important to recognise that you are unlikely to make everyone happy. “It was a great transaction for us, and the vast majority of LPs chose to take liquidity. Despite that, there sometimes could be an underlying sense of suspicion that the GP is somehow getting a better deal. If you are considering a continuation vehicle, it is important to communicate all elements and dynamics of the transaction to LPs clearly.”