Thinking about secondaries when drafting an LPA

The fundamental building block of the LP-GP relationship is changing, and secondaries is one of the factors driving that change. Three lawyers discuss end-of-life terms and control over stake sales in this extract from a roundtable in sister publication pfm.

The secondaries market is affecting limited partnership agreement drafting and negotiation. More limited partners are transacting fund interests while general partners are becoming more proactive in addressing end-of-fund-life issues and in dealing with portfolio and fund management.

Several funds from 2003-07 vintages have undergone significant GP restructurings in the past few years, explains Proskauer partner Nigel van Zyl, although the initial LPAs didn’t deal with such scenarios.

Should today’s LPAs contain wording to account for solutions for the end of the fund’s life? Van Zyl advises not to “draft prescriptively for an event eight to 10 years down the line in what’s a rapidly evolving market.”

Instead, “draft conceptually and then allow the market to determine what the transaction would look like as opposed to trying to draft prescriptively. I think if you’re trying to draft prescriptively, you’re probably going to do it wrong.” Concepts to take into account include the percentage of votes required to allow a process or the governance of fund extensions.

Draft conceptually and then allow the market to determine what the transaction would look like as opposed to trying to draft prescriptively. I think if you’re trying to draft prescriptively
Nigel van Zyl

Michael Lampshire, the director, funds legal at Actis, notes his firm has had discussions on the topic in the context of its longer life products. “We thought about it, but less in terms of GP-led restructuring and more about liquidity,” he says. “Some investors such as funds of funds who are restricted by their own holding periods will look for enhanced liquidity provisions or extension provisions in documents for longer life funds. Our view is that less is more in this area. Secondary markets are very sophisticated, so provided the fund documents fundamentally and mechanically allow the process to happen, there is limited advantage in drafting detailed provisions on day one that invariably will need adapting to meet market dynamics at a future point in time.”

In terms of straightforward stake sales, GPs can exercise control in the LPA through its consent right over potential buyers and over provision of confidential fund information by sellers to third parties.

Allowing sales of fund interests remains more of a commercial decision on the GP’s part than a legal issue. “As much as possible we will be helpful to an LP wishing to sell down its exposure to one of our funds, although we will consider long-term relationships with potential buyers as part of the process,” says Lampshire. 

“There may be valid reasons for objecting to a request, but in most cases it makes sense for the GP to be amenable to the request of the transferring LP and commencing a relationship with a new LP,” adds Andrew Panayides, Duke Street’s general counsel. “We’ve seen some of our LPs asking in side-letter requests to be informed of any potential LP transfer and for the right to participate in the transfer process.”


Nigel van Zyl
Partner – Proskauer

Van Zyl advises GPs on all aspects of their fund business, including the formation, raising, maintenance and ongoing operation and compliance. He also represents institutional investors such as funds of funds, sovereign wealth funds and global asset managers, and buyers and sellers of secondaries fund interests.

Michael Lampshire
Director, funds legal – Actis

Lampshire joined Actis in 2015 and previously served as legal counsel at Campbell Lutyens and as an associate at Clifford Chance. Actis, which was founded in 2004, is a leading investor in growth markets in Africa, Asia and Latin America across several asset classes including private equity, energy, infrastructure and real estate. It has raised around $13 billion since inception and has deployed over $7 billion in more than 40 countries across its markets.

Andrew Panayides
General counsel – Duke Street Private Equity

Panayides joined Duke Street in 2015 from law firm King & Wood Mallesons, where he specialised in funds and corporate acquisitions. He also has experience implementing fund structures, structuring investment management platforms, advising on and forming joint ventures among others. Duke Street was founded in 1988 to focus on the European mid-market buyout space.

This roundtable was sponsored by Proskauer and first appeared in the May issue of sister publication pfm.