CCO tips: Regulatory Compliance Watch brings us this article laying out key tips for private funds CCOs as they monitor their firms remotely and fortify them against the strains of the liquidity crunch. It also includes two relevant case studies.
Guide to GP liquidity solutions: Over the rest of the week, we’re providing excerpts from an upcoming guide to GP-led liquidity solutions from Proskauer. Each post will include descriptions of the type of solution, scenarios for use, and specific considerations to take into account. Today, it’s GP-led restructurings, below.
Solution: GP-Led Fund Restructuring
Description:
Existing LPs are given an opportunity to (A) cash out of their interests in the fund with proceeds received from new investors, (B) retain their interest in the fund (potentially with new terms, including, as applicable, having a pro rata share of an increased commitment) and/or (C) make a “status quo” election where the existing limited partner neither cashes out nor assumes an obligation to make future capital contributions.
Existing LPs and new investors are given an opportunity to make a new investment in the fund’s portfolio (often through a newly-created special purpose vehicle, or SPV, managed by the GP or its affiliates, that purchases the fund’s portfolio from the existing fund entity).
Scenarios for use:
1) Provides existing LPs with a liquidity option, the fund with access to additional capital to shore up the fund’s portfolio, and secondaries buyers the opportunity to invest in a known portfolio.
2) GP and LPs seeking to realign interests can negotiate new terms. New terms frequently include one or more of the following: extension of the length of the fund’s term and/or investment period, updates to governance provisions, changes to the management fee and/or carried interest, adjustments to concentration/diversification limits and modifications to borrowing limitations.
Specific considerations:
1) Heightened emphasis by investors and regulators on valuation, transparency, and disclosure given inherent conflict of interest (the GP and its affiliates are on “both sides” of the transaction).
2) Intra-GP issues should be reviewed and anticipated. GP members participating in the carried interest with respect to the restructured fund or SPV (if applicable) may not always be the same as those receiving carry through the fund’s existing GP, whether due to personnel departures or otherwise, and vesting schedules should be reviewed to ensure proper alignment. Potential GP clawback obligations should be reviewed carefully. Existing LPs are likely to require satisfaction of any GP clawback prior to approving a restructure.
3) Company-level transfer rights and restrictions to be considered across portfolio.
4) Offering a “status quo” option for existing investors is prudent and often necessary.
Email prepared by Graham Bippart
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