ILPA’s upcoming continuation fund guidance to target GP rationale

Some LPs have felt so frustrated at the way continuation fund processes have been run that they have decided not to re-up with their manager, representatives from the investor body told Secondaries Investor.

The private markets industry’s most influential LP body is set to release specific guidance for continuation funds with a focus on helping institutional investors determine why a sponsor wants to run such a process over other options.

The Institutional Limited Partners Association aims to publish specific guidance on single- and multi-asset continuation funds as early as next month. The update comes four years after it first issued best practices to limited partners on how to navigate GP-led processes.

“What our guidance is looking to do is to put guardrails in place to ensure ideally better dynamics between LPs and GPs, with an emphasis on transparency, with an emphasis on rationale for the transaction,” Neal Prunier, senior director for industry affairs, told Secondaries Investor in London on Tuesday on the side lines of the ILPA Summit Europe 2023. “We’re looking to introduce something that looks at the process more holistically.”

In addition to rationale, an underlying principle of this latest guidance will focus on status quo options and that no LP should be worse off financially.

“Any benefits that accrue should accrue for LPs and the fund, not just for GPs,” Prunier said. “What we see in the industry today is the benefits that accrue, accrue for the GP. That’s problematic.”

Some LPs have been frustrated that continuation funds are put to them in a “reactionary” way, even to the point that they have decided not to re-up in a particular manager’s fund having been left with a “sour taste” in their mouth, Prunier said.

“The GP comes to them and says, we’re running a continuation fund. There isn’t really that point for LPs to say: we don’t necessarily want this,” added Brian Hoehn, a senior associate at ILPA.

Pain points for LPs include shortened time periods – such as 10-to-20 business days – within which they must make a decision on whether to roll or sell their exposure; lack of clarity over what a true status quo option would entail; and enhanced guidance on how to identify conflicts of interest, especially for the limited partnership advisory committee.

For an LP without co-investment or direct investment capabilities, electing to roll in a continuation fund process often involves a re-underwriting of fund documents – something that has led to LPs having no choice but to sell their exposure, Prunier said, adding that the typical split is that 85 percent of LPs in a fund sell while 15 percent will roll.

“It’s not that this [updated guidance] is necessarily going to change that split… but it’s going to ideally create a scenario where there’s less forced selling, where LPs have no option but to sell because there’s just fundamentally no way a team can carry out diligence and re-underwriting on one asset in 10-to-20 days while also managing the whole rest of the portfolio,” Prunier said.

ILPA’s guidance, while not aiming to be prescriptive, will recommend that LPs ask GPs to provide additional rationale if a continuation fund process is sought before all unfunded commitments are drawn – typically within the first three to five years of a fund’s life.

In some circumstances – such as a well-performing asset hitting size restrictions as per the fund’s limited partnership agreement – LPs will want to discuss with the GP whether simply amending the LPA to increase size restrictions, or moving the asset into a continuation fund, are better options.

“Those are the types of discussions that happen [around] the rationale,” Hoehn said. “That’s why this framework for the guidance is important – it will allow LPs and GPs to understand what’s important to both parties and have those conversations.”