Idinvest: LPs negotiating ‘harder and harder’ on the LPA

Idinvest Partners held the final close on its Secondary Fund III on €442m in June. We caught up with Guillaume Cavalin, the firm's legal director, to get his take on how private equity fund structuring – and LP demands – are changing.

Guillaume Cavalin

Idinvest has made a number of operational hires over the past year – what is the rationale behind this?

GC: Idinvest has enjoyed fantastic growth over recent years, with our funds under management increasing from €2.5 billion to €9 billion. This growth is in part thanks to our increased international presence, as well as the success of a number of our portfolio companies, including the five that went public on the Nasdaq (including Prosensa, which earned Idinvest a 7.6 multiple) and a number of new strategies that we have developed. Therefore the need to hire more personnel to handle the operational aspect of the business has been paramount.

What have been the main changes you’ve seen in terms of private equity fund structuring over the last five years?

GC: We have seen a number of changes over the last five years, most notably the trend towards French funds being created under the form of companies. Furthermore, since the implementation of the Alternative Investment Fund Managers Directive in France, the appointment of a management company is now mandatory, with only a few exceptions to this principle. We have also seen prospective investors negotiating harder and harder on the fund’s LPA, especially around the following provisions: investment strategy, diversification ratio in target company, geographical diversification of the investments, GP commitment, hurdle rate, waterfall of financial rights, recycling rules, and revocation of the management company and associated provisions around revocation.

What provisions particularly related to revocation of the management company?

GC: Key provisions include the definition of the fault triggering the revocation, the majority required to initiate and vote the revocation and the conditions under which the carried interest units held by the management team must be vested to the new management company. Finally, as fundraisings and investments are becoming more and more international, the tax treatment at the level of the investors and of the investments is becoming fundamental, for example, the application or not of tax treaty, or the application or not of withholding taxes.

Idinvest’s private clients are an important component of your investor base. What structuring techniques do you apply for private clients to satisfy their needs?

GC: We undertake a number of steps to ensure the needs of our private clients are met, such as the setting up of funds answering to the specific needs of certain investors in terms of target companies, investment strategy and geographical area. As well as this, we also setup dedicated funds for a broad range of investors such as corporate investors and institutional investors. Tailor-made private equity programmes are also made available to our investors to provide them with a private equity strategy and regular analysis.

Technology and data are increasingly key to LP reporting and seeking out investment opportunities. How does Idinvest use data to get an edge over the competition?

GC: The incredible pace of technological change has gone a long way to help the LP reporting process and the ability to seek out investment opportunities. It is becoming more and more important to invest in the myriad of technology tools and platforms available in order to keep pace with the competition, and whilst we cannot comment directly on how we use data, it is something we are investing a lot of time and effort in.

How is Idinvest planning for Brexit? What regulatory changes are you anticipating for example on AIFMD and UK compliance?

GC: As a continentally headquartered firm which provides investment to companies across Europe who are looking to grow into new markets, Idinvest is in a strong position as it is unlikely that Brexit will directly impact our business. Post-Brexit, if the marketing passport provided by the AIFMD is no longer possible, contact with prospective investors will be carried out in compliance with the UK national placement regime.

Guillaume Cavalin is Idinvest Partners’ general counsel and works mainly on private equity funds, debt funds, funds of funds, dedicated funds, and co-investment funds. Before joining Idinvest, Guillaume worked for international law firms in Japan (2003-2006), in Luxembourg (2007-2011) and in Paris (2011-2017).