Secondaries buyers and service providers beware: the Institutional Limited Partners Association is about to give LPs a whole new set of tools designed to help them make better decisions when it comes to GP-led processes.
The industry body is set to issue its first version of guidelines on the topic this month – a four-to-five-page document that will later be rolled into version 3.0 of ILPA’s private equity principles document.
Secondaries Investor caught up with Steven Nelson, ILPA’s chief executive, at Invest Europe’s recent investor forum in Geneva. Here are five key takeaways from our conversation.
1 The guidance will be explicit on timelines
One of the main pain points for LPs is the timeframe and notification periods thrust upon them from GPs running potential secondaries processes. This is particularly so when conversations begin late and are relatively shallow, Nelson said.
LPs, already under enormous strain from the volume of re-up decisions they have to make from their primary relationships, are feeling frustrated when a secondaries option is thrown at them with little time to make a fair decision.
“A lot of these groups are thinly staffed,” Nelson said. “When you think about how these processes are built into their own internal systems, there isn’t much flex there to begin with. When they’re presented with one of these transactions, reallocating resources, devoting four to six weeks to it is something they’re just not in a position to do.”
Nelson declined to share the exact timeframe the guidance will give but said: “It does feel like there’s a baseline there that would be worth establishing.”
2 It won’t touch on re-invested carry…
What’s the ideal percentage of carried interest made from a fund restructuring that a GP should re-invest in the continuation vehicle for alignment purposes? Secondaries Investor has heard figures ranging from 50 percent to 100 percent.
ILPA and its members discussed this very issue and gathered case studies, but ultimately decided the dynamics of each deal were too unique to generalise.
“We haven’t gone to that level,” Nelson said. “That felt like a place that would be overly prescriptive.”
3 …but it will touch on deal expenses
Who bears costs in a GP-led deal? The guidance will provide best practices around this, including how transaction-level expenses are allocated. There won’t be a formula per se, simply an indication as to what all parties (including advisors) should consider, Nelson said.
4 ILPA acknowledges that every deal is unique
“It’s a balancing act,” Nelson said, adding that while ILPA intends to be fairly explicit in terms of guidance, it recognises there will continue to be a lot of variation around fund and GP-specific issues.
“If there’s an opportunity to create a standard that can apply generally, we’ll try and do that.”
5 GPs, treat thy LPs as thyself
While most LPs are supportive of more liquidity in the market and tools that provide price discovery, concerns and frustrations come when motivations are unclear, where the conversation begins late and where data are asymmetric between GP and prospective buyer, and LPs. These sorts of annoyances happen routinely, Nelson said.
Creating a common baseline and reference point for GP-led transactions should lead to “more efficient, better outcomes for all involved”, he added.