Navigating Continuation Fund Transactions: ILPA Guidelines for Limited Partners and General Partners in Private Equity Funds

The Institutional Limited Partners Association (ILPA), a group that issues guidance that is often influential to institutional investors in private equity funds, recently released guidance outlining considerations for limited partners (LPs) and general partners (GPs) regarding continuation funds. Continuation fund transactions have risen to prominence in recent years, with more GPs exploring moving one or more assets from a private equity (PE) fund into a continuation vehicle. While such a transaction offers more optionality to PE fund investors, investors may raise certain questions or voice concerns about the transaction. Even the Securities and Exchange Commission (SEC), in its recently proposed rules setting forth various reforms to the disclosure and compliance obligations imposed on private fund advisers summarized in this link, proposed to impose various new obligations on advisers seeking to effectuate a continuation fund transaction. While the ILPA guidelines recognize the bespoke nature of these transactions and for the most part do not seek to regulate their substantive aspects, the guidelines do provide some helpful suggestions as to how GPs and LPs should proceed with respect to these transactions. While it is our view that many GPs in the PE fund industry already comply with the vast majority of these suggestions, it is nevertheless helpful for a GP to bear this guidance in mind as it considers structuring a continuation fund transaction and refer to it as a guide to potential questions or comments that may be raised by the LPs. The remainder of the article summarizes what we felt were some of the most relevant aspects of the ILPA guidance that GPs and LPs should be aware of.

Managing Conflicts Related to the Transaction

ILPA recommends that any conflicts of interest related to the transaction should be mitigated and cleared as they arise. In this respect, ILPA suggests that the GP should identify such conflicts and seek to mitigate them by consulting and securing the approval of the applicable fund’s Limited Partner Advisory Committee (LPAC). Given the difficulty to adequately cover all of the aspects of such a transaction (as well as the regulatory environment) in the fund’s governing document, which may have been drafted more than a decade before the transaction is sought to be effectuated, consultation with the LPAC can be very useful as a way to reduce potential friction with the LPs.

Disclosure Issues

From a transparency perspective, ILPA indicated that LPAC members should be provided with sufficient information about the continuation fund transaction and the process followed so that they might understand whether the transaction was appropriately structured and whether a fair price was obtained. In this respect, any breakup or termination fees that may arise in the event of an incomplete transaction should also be reviewed by the LPAC. Additionally, these disclosures should be provided to LPs beyond the LPAC as early as possible to allow sufficient time for a review of the transaction. GPs should also make themselves available to address any questions about the process, ensuring that LPs can make fully informed decisions.

LP Failure to Elect

If an LP fails to respond to the election within the required time (ILPA suggests 30 calendar days or 20 business days as an appropriate election period), the election for these LPs should be treated as liquidating their interests rather than rolling into the new vehicle. LPs should not be forced to roll their interests into a new vehicle.

Independent Fairness Opinion Provider

LPs as a group may request that the GP obtain a fairness opinion for the fund produced by an independent valuation agent. ILPA indicated that it is important to have some level of independence with respect to the value of the underlying assets since that is a material item associated with the transaction. We’ve found that an independent valuation can be helpful to protect the GP from claims that one group of investors benefited vis-à-vis another set of investors. Please note that the SEC, in its proposed rules setting various reforms to the disclosure and compliance obligations imposed on private fund advisers referenced above, would require private fund advisers to secure a fairness opinion from an independent valuation agent in connection with these kinds of transactions.

Conclusion

With continuation fund transactions growing in popularity, ILPA is seeking to create benchmarks around the transparency and procedural aspects of these transactions to ensure that they are effectuated in an efficient and appropriate manner. ILPA recommends that GPs should focus on processes and deal structures that maximize alignment and LP engagement, while LPs should focus on anticipating how to engage in the process and request needed disclosures.