Private equity managers may be increasingly selling assets from their classic drawdown funds into new standalone vehicles they control, but their investors also are stepping up their focus — pushing during fundraising negotiations to set clear terms on how those continuation vehicles will work, industry watchers say. In 2023, the Institutional Limited Partners Association, or ILPA, released guidance for best practices in continuation funds, which LPs are seeking to codify, said Mandee Gruen, a partner and co-chair of the Private Investment Funds practice at Goodwin.
These terms are usually included in so-called side letters, which are individual agreements LPs make with GPs as part of their capital commitments that often do not apply to a fund's other investors. Most often, LP concerns about continuation funds center on three major concepts: getting ample ability to consent to the transaction, getting proper validation of the price at which the asset will sell, and ensuring that the GP is sufficiently transparent about the overall process, Gruen said. “Those are the three key things that LPs are looking at,” she said. “Within the last year, it's become a real focus. And it is [happening in] every fundraise I'm working on right now.”
Last fall, the Abu Dhabi Investment Council sued Houston-based manager Energy & Minerals Group to halt the transfer of a portfolio company to a new vehicle over concerns about the valuation and process, according to Bloomberg. The parties agreed to go into arbitration, which found in favor of the manager, and the case was dismissed last week, according to court filings. Nevertheless, it has drawn a lot of attention in the private funds space, Gruen said.
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