“Enhanced transparency on how these deals come together, on the interests of the parties involved, on who’s getting paid and who’s getting paid what.” This was how Jennifer Choi, managing director, industry affairs, at the Institutional Limited Partners Association summed up the objectives of the guidelines on GP-led secondaries deals, released on Thursday.
The document provides clarity on several key issues, around the definition of status quo, the role of the LPAC and on the appropriate amount of time that LPs should be given to make a decision, all of which is covered in our coverage here.
The early response has been positive. One Nordic LP told Secondaries Investor that the next time a GP-led deal crossed his desk, he would “definitely” consult the guidance, adding: “ILPA did a good job with their credit lines guidance a couple of years back.”
Paul Cohn, former secondaries head at Fort Washington Investment Advisors and now an independent investor, said the guidelines provided a “roadmap” that could bring hesitant LPs around to the benefits of GP-led deals, helping further develop the market.
But the guidelines are equally, if not more important, to GPs. Most LPs, particularly the larger ones, have by now encountered several GP-led deals and real-world experience of how to deal with them. For many GPs, the process they initiate on their own fund will be the first they have ever encountered.
Complex secondaries deals shine a bright, sometimes harsh, light on the LP-GP relationship. The failure to inform LPs that a GP-led deal is taking place, to identify and immediately deal with potential conflicts of interest, the inability to explain why a deal is beneficial for LPs and not just an economic boon for the manager. These mis-steps can cause real reputational damage, potentially hurting GPs’ ability to raise capital in the future.
Poor execution is also a turn-off for secondaries buyers. “In a GP-led, if there’s no process, we won’t do it,” says the London-based investment head at a dedicated secondaries buyer. “If you don’t do the right thing, LPs are not stupid. If they’re engaged in a process they think isn’t run properly, they’re definitely not going to sell.”
ILPA may have produced these guidelines for its own membership but their impact will resonate beyond.
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