If done right, GP-led deals can benefit both managers and LPs, and getting there requires effective communication and a degree of trust. Law firm Proskauer Rose’s Howard Beber and Michael Suppappola tell Secondaries Investor about the challenges and benefits of navigating a GP-led restructuring for a fund manager.
What’s in it for the GPs and LPs?
HB: GP-led restructurings can be very useful for both GPs and LPs if done under the right circumstances. They certainly can provide liquidity to LPs. They can also reset fund economics for the GP, such as resetting carry, and increasing the management fee in some cases with respect to the secondaries player only. So they could be a win-win for everybody but you have to be careful about how you go about structuring the deal.
It can be a long and time-consuming process, the success of which depends on a lot of factors, such as how many LPs are there, who are the LPs, what’s left in the portfolio [of the fund], and how old is the fund. There are a lot of moving parts. Of course, how complex a restructuring is depends on the terms of the partnership agreement as well. They are hard transactions to get done.
What are some key components that allow for a successful GP-led restructuring?
MS: The ones that go well tend to share a few characteristics. First, it’s crucial that the GP is really active in reaching out to LPs before they start receiving legal documents in order to gauge their interest and react to any concerns upfront. After that, for smooth sailing, it’s critical that LPs are provided with a true status quo option. That means, if they don’t want to sell, there are not significant strings attached to remaining as an investor. Generally, LPs want to understand that they won’t be adversely affected by a deal. If that is the case, LPs are more inclined to agree. For the GP, it’s simply a question of what is the objective of the restructuring, whether it’s follow-on capital, more time [to exit existing investments], more budget or something else, so they can figure out a mutually beneficial deal with the secondaries buyer and the LPs.
I think some of these [GP-led restructuring deals] fail due to lack of trust. I haven’t heard a lot of unhappy LPs lately, so that would lead me to conclude that people are feeling good about the process and lessons have been learned over time.
Do you think a large mega-fund manager would ever engage in GP-led restructuring?
MS: Generally I think larger and more diversified firms might face less pressure to keep management fees flowing in the later years of a particular fund, but I don’t see why larger PE firms wouldn’t at least consider them if the situation calls for it. At the end of the day, benefits [of GP-led restructuring] are often more specific to the circumstances of a particular fund rather than the firm itself.
What’s the latest from the SEC on GP-led restructurings?
HB: The SEC seems to have the view that LPs don’t always know what they’re getting into because of the complexity [of restructurings]. They are often complex, and fair and accurate disclosure is necessary
MS: When parties involved with past GP restructurings make headlines for egregious behaviour or bad acts, it’s obviously not good publicity but I do think most in the secondaries community recognise those types of activities as aberrations that are not really reflective of restructurings as a whole. The SEC is very focused on disclosure of conflicts. If the GP receives a benefit from a stapled commitment to a new fund or an increased fee or a restructured waterfall, the GP should be completely transparent about those benefits so that LPs can make fair, informed decisions. It really comes down to full and fair transparency with LPs. That’s what the SEC is looking for.
Why do most GP-led restructurings happen in North America? Have you seen any in Canada?
HB: Maybe the US market is a bit more ahead of the European market on this issue. Anecdotally I’ve seen a few Asian deals recently that have some components of a restructuring.
MS: I worked on a large UK-based GP restructuring just last year. I do see them and have done them [in Europe]. I don’t think it has to do with any particular stigma in those jurisdictions. There’s just a lot more volume in terms of US GP-led restructuring because the US is where you currently have the most funds reaching the dissolution stage. So you naturally have more US GPs considering the benefits of restructurings and tender offers.
Regarding Canada, there was a relatively sizeable Toronto-based GP that restructured a few of its funds just last year. There’s not the same volume [of restructurings] in Canada but I have seen them. I frequently see Canadian secondaries buyers involved in these deals as well.
Howard Beber is a partner in Proskauer Rose’s corporate department and co-head of the private investment funds group, and Michael Suppappola is a partner in the firm’s corporate department and a member of the private investment funds group. Both are based in Boston.