Misaligned incentives are the primary concern for limited partners engaged in GP-led processes, according to Coller Capital‘s latest industry survey.
Potential misalignment between counter-parties was cited by 86 percent of LPs as an area of concern in these deals, according to the summer 2019 edition of the secondaries firm’s Global Private Equity Barometer, based on data from 112 private equity investors.
The second most common concern was a lack of information from which to make an informed decision, cited by 72 percent of respondents. Difficulty in meeting the GPs’ required timeframe and a lack of resources to process the additional workload were also cited.
At least half of LPs in Europe, North America and Asia have encountered a GP-led process on a fund in which they are invested. Levels of participation are lower in Asia, which Coller partner David Jolly suggests is down to the relative immaturity of the market and the fact that Asian LPs tend to have fewer, less global GP relationships.
“I don’t think there’s too much to read into the receptiveness [of Asian GPs to GP-led deals] or anything like that,” he added.
Just over 40 percent of LPs expect their organisation to have more than one-tenth of their total assets in private equity within 10 years. Today that figure is 34 percent, the survey noted.
In the Institutional Limited Partners Association’s April guidance on GP-led restructurings, the industry body suggested that independent counsel or specialist advisors to a fund’s limited partnership advisory committee could be considered in some circumstances to deal with alignment issues.
“The use of independent advisors may be recommended in transactions that present greater potential conflicts of interest, such as when the transaction offers significant future financial benefits for the general partner that may not align with the interests of limited partners seeking to maximise the value of the underlying assets,” ILPA noted.
LPAs should provide details for the LPAC to engage independent counsel, which in most cases should be paid for by the fund, the group added.