Despite fund managers being able to get lawyers around a negotiating table to finalize a fund commitment, it is no longer a foregone conclusion that the LP will sign the dotted line, market sources tell PE Manager.
Fund formation lawyers say they’ve been busy drafting side-letters and legal documents for their GP clients only to see the deal ultimately collapse.
“We are seeing more situations where one party walks away,” said Roger Singer, a partner at law firm Clifford Chance. “This is in part because LPs have been more demanding about governance and other legal terms. In previous years, the likelihood of closing once lawyers were talking was extremely high.”
Issues around regulation, tax, environmental, social and governance (ESG) factors are becoming important parts of the investor’s process and those things can cause commitments not to happen, said one UK-based placement agent.
“Although all the words might have been positive until that point, it can be that for whatever reason something happens and that presents a problem,” the placement agent said. “Thinking of a fund we just raised – we had to do 15 operational due diligence questionnaires, that just didn’t exist before. And we had to do ten ESG questionnaires which didn’t exist before; maybe they asked a question or two but not at this level.”
For more developing trends around the LPA negotiation process be sure to check out the May issue of PE Manager.