My Notes from ILPA's Legal Town Hall - Deal Killers
/Here are my notes from ILPA’s 3/19/20 Legal Town Hall on Deal Killers. Several LP’s discussed the most common non-investment related issues they see. While all organizations have different levels of comfortability on these issues, it’s useful to see what risks LPs are seeing and their mitigation approach. These risks focus on issues besides the typical investment and fee concerns.
General Risks
· Tax Risks
o Example - can LP accept double taxation?
o Can LP follow tax compliance?
· Missing Information
o LPA doesn’t contain necessary LP protections or market terms
· Provision that would cause a violation of law
o Plans that fall under ERISA were especially cognizant of this risk
GP Focused Risks
· Key person risk: LP wants to protect against one specific individual leaving but GP isn’t willing to allow trigger on that sole individual; GP insists on excessively broad key person triggers
· SMA accounts with the GP that will compete for investment allocations and/or distract GP focus
o Get clarity on how GP will handle allocations and assess ability to manage various accounts
· Lack of limits of investment authority – mandate allows too much flexibility
o GP claims they want flexibility to pursue opportunities outside of their current strategy
o LP response 1) they hired the GP for a specific skill-set 2) strategy has a particular fit in an asset allocation and LP needs clarity on strategy and exposure
· Lack of clarity on underlying investments
o For example - is the LP able to get clarity on intellectual property assets?
o How will they be valued?
o Can the LP verify the substance of the assets?
· Lack of LP protections that are market standard
o Appropriate fiduciary standard, for example
LP Focused Risks
· Restrictions on LP investment activity – use standstills and non-competes
· Provisions that limit investment activity of LP
· LP can’t invest in certain assets given GP investment in certain assets
· Fund requires atypical indemnities or guarantees
Name/Reputation Concerns
· Reputational/Headline Risk
· LP doesn’t want name associated with GP that is involved in controversial industries
· Authorization to use LP’s name
o Will use side letter to specify allowable circumstances
GP Behavior/Communication
· Example: GP using private jet
o Not an absolute deal killer but need to put a price on use to get comfortable
· How is the GP communicating certain issues?
o Are they sneaking things into the LPA?
o Intent and honesty matter – are they forthcoming?
· Focus on affiliated transactions and use of affiliated operating partners
o Trying to keep fees centered on management fee and carry
o Avoid the abuse of other fees being charged to the fund
Summary
· The contract only protects use so far – it’s a relationship and trust matter. Can’t contract around bad faith or dishonesty
· Everything is a system of trade-offs
· Look at entire package holistically