Fund restructuring without friction

Dear PEI,

Your recent article “Fund restructurings: a source of friction” raises some interesting points, where as a secondary advisor across all types of GP-led transactions, including fund restructurings, we have a different perspective.

Are you being forced to sell your house? No. As an LP, you are more like a tenant of the fund’s assets with a 10-12 year lease. The GP, as the freeholder, has a break clause at any time they believe it’s appropriate to sell the assets. A fund restructuring, in contrast to an outright sale of the assets, gives the tenants the opportunity to choose between re-leasing the assets, leaving the building, or (by voting together with other tenants), to block the move altogether.

Should an LP be able to do nothing? Yes and no. Clearly if a GP is selling assets to another vehicle it controls, it has a conflict of interest that needs to be managed. Part of managing that conflict is engaging with LPs and ultimately seeking approval via the LPAC and/or an LP vote, and this requires time and attention on behalf of LPs who will want to assess their options thoroughly, whereas they signed up to the fund expecting the GP to take the buy/sell decisions.

It is important, therefore, for GPs and their advisors to carefully assess the cost/benefit of engaging in this exercise: There needs to be a compelling rationale for why a restructuring is in the best interests of a significant majority of LPs, because it places a burden on LPs that selling the assets in the ordinary course does not, and places a further burden on rolling LPs to sign up to the new documents. The more LPs who actually want liquidity, the more likely it is a restructuring makes sense – since in a restructuring, as with an asset sale, the ‘do nothing’ option leads to a distribution of proceeds.

Why would I want to move house? Sometimes, the building next door can be roomier, in better condition, and better located! A ‘good’ fund restructuring will add value both to selling and rolling LPs, because the new fund structure will be optimised to maximise value from the assets for sale. Therefore, rolling LPs will make higher returns than in the old fund structure, and selling LPs will receive a higher price than they would otherwise. This might be due to securing follow-on capital to make accretive acquisitions, to realigning incentives (for instance) due to a significant portion of the carry being held by leavers, or other factors. Well worth the hassle of packing up a few boxes!

Do you need to force the hand of LPs? Absolutely not! If the new building isn’t more attractive, you should not ask people to move. Any GP-led secondary process should be a positive exercise for LPs. With pricing at all-time highs, a recent Palico survey showed 65 percent of participants viewed fund restructurings as ‘a healthy part of the market’ – but GPs and advisors should remember that it is only viable if your LPs agree with the proposition.

In summary, most of the GP-led transactions we pursue aren’t fund restructurings, because a simpler secondary solution is better for LPs, but fund restructurings in the right circumstances, and handled well, can be a powerful tool for LPs and GPs alike.

Yours sincerely,

Jonathan Abecassis, director, Credit Suisse Private Fund Group