Institutional Investor Newsletter

1. Trends in continuation vehicles for private equity sponsors

A recent trend in continuation vehicles involves traditional private equity sponsors serving as the “lead investor” in lieu of, or in addition to, more traditional secondary buyers and institutional investors. This expansion of the buyer universe may have the potential to improve the market for sellers through increased competition.

2. ILPA guidance impacts NAV lending negotiations

Net asset value (NAV)-lending limits are gaining attention as Institutional Limited Partners Association (ILPA) guidance permeates the industry and is reflected in fund documentation. Frequently negotiated terms include aggregate limits on NAV borrowing, limits on borrowing uses (eg, making distributions), and limits on how late in a fund’s life NAV borrowing may be incurred.

3. Clarifying whistleblower protections for limited partners

Sponsors are revising partnership agreements to clarify that limited partners are free to convey information to regulators and legal authorities, notwithstanding narrowly drafted confidentiality provisions that might otherwise discourage voluntary disclosures.

These revisions are primarily intended to satisfy Securities and Exchange Commission (SEC) guidance. However, they may provide greater certainty to investors who might otherwise be unsure of their legal rights when asked to comply with voluntary requests for information or asked to cooperate in regulatory investigations.

4. Navigating SEC scrutiny on transaction terms

Sponsors are increasingly moving away from limiting conflicted transactions to “arms’ length” terms, citing SEC scrutiny that requires strict benchmarking of fees and services in order to satisfy Advisers Act compliance.

If sponsors are unwilling or unable to obtain the benchmarking information necessary to satisfy claims of providing services on “arms’ length” terms, investors will need to find alternative ways of ensuring that these affiliated services are provided on competitive terms, and are not serving as additional opportunities for profit.