General partners are reluctant to clarify whether limited partners or GPs should pay for fees and expenses in the event of a fund extension or fund restructuring in their initial limited partnership agreements.
More than half, 53 percent, of private equity firms don’t include a stipulation of who pays for the costs of potential fund restructurings in their LPAs, according to pfm’s 2018 Fees and Expenses Benchmarking Survey. A similar share, 51 percent, said that there is no stipulation on which party pays for costs during a fund extension in their LPAs.
GPs prefer to negotiate such terms at the time of an extension or restructuring rather than trying to predict what to do ahead of time.
“Generally, it’s something that’s addressed when the time comes, although we have had a few incidences where LPs have asked us to insert some language which might guide that discussion,” said co-chief executive officer of the Riverside Company, Stewart Kohl. “But our view is if an extension for example is needed, it’s really fact and circumstance driven. Why do they need it? And for how long?”
Kohl thinks it’s easier to negotiate something when it happens than 10 years earlier, which is why he says the best plan is to not plan at all when it comes to these issues. By not planning, it can leave more flexibility for LPs to negotiate when the time for an extension or restructuring arrives.
“While some investors want to include some guiding language, we don’t think it’s really possible to accurately predict everything that might happen 10 years from now,” Kohl said. “And, if there is no language on fees during an extension, the LPs can always refuse to extend without a fee reduction and there will be a negotiation with the GP at the relevant time, not 10 years earlier.”
However, not planning at least a little could be dangerous, too. Extending the life of a fund or restructuring funds, while useful if done right, can be complicated and have negative impacts if not properly handled, according to Tom Angell, partner at WithumSmith+Brown.
In September, The Institutional Limited Partnership Association’s managing director of industry affairs, Jennifer Choi, talked about the organization’s plans to release guidelines on GP-led restructurings – of particular interest for those who believe restructurings are not conducive to a one-size-fits-all approach.
ILPA will release the guideline sometime in early to mid-2019, as well as a model LPA in the first quarter of 2019, ILPA’s director of industry affairs, Chris Hayes, told pfm.