End-of-Term Funds: A Guide for GPs and LPs

Ten years ago, private equity fundraising was reaching new highs after re-emerging from the 2008 global financial crisis. Ten years later, many of those funds are hitting the ends of their terms. Meanwhile, we are several years into a dip in exit activity, and many of those more seasoned funds continue to hold meaningful assets. Most limited partnership agreements provide a mechanism for term extensions—and GPs are making those requests—but as time passes, both GPs and LPs may start asking, “what next?”

For some funds, the parties may be comfortable using a term extension to give the GP time to sell the fund’s investments. In other cases, a GP-led fund restructuring may prove an attractive opportunity to allow liquidity for interested LPs while retaining the ability to achieve further returns on some or all of a fund’s assets. In a small minority of cases, however, LPs may eventually lose confidence in the manager as the fund stumbles along with no clear path to exit. Increasingly in recent months, we have been fielding calls from GPs trying to navigate a path to liquidity for their LPs, and from LPs trying to understand whether they may have contractual options to navigate out of an investment in a so-called zombie fund or a fund in distress. We set forth below some high-level guidelines for such conversations for both GPs and LPs.

Guidelines for GPs of Funds Nearing the End of Their Term

• Clear communication with LPs about the anticipated path to exit is critical.
• Liquidating trusts are commonly explored, but their appropriate usage can be limited.
• Depending on feedback from LPs, consider alternative strategies for generating liquidity for LPs, including continuation funds, tender processes, NAV financings, etc. If you pursue one of these paths, remember to consider your obligations not only under the main fund LPA, but also under any co-invest arrangements. For each of these options, full and clear disclosures to LPs are key.
• Without losing sight of your core fiduciary duties to the fund and its investors, do not forget the broader relationships you may have (or hope to have) with each LP. In particular, decisions made with respect to one fund may impact other products, both directly and indirectly, especially if the GP is viewed as profiting at its LPs’ expense.
• Remember that many of the potential paths may have regulatory implications and/or require LPAC and/or LP consents. We have found that engaging with LPACs early results in more successful outcomes in paths to provide liquidity to LPs.

Guidelines for LPs of Funds That Are Past Their Desired Term

• Maintain clear communication with the GP about your desired outcomes for fund assets (e.g., would you prefer for the fund to sell an asset now to generate liquidity, even if there might be further upside with a longer hold period?).
• Understand the current state of play when considering your options, including your rights under the LPA, your side letter, and other governing documents. (As an aside, do not forget to make sure you have the current documents at hand when evaluating your options; it is surprisingly common to discover an LP does not have the current fund documents in hand when they reach out for help evaluating a fund’s proposal.)
• Consider economic incentives and/or deterrents.
• Remember to consider the entirety of your exposure when evaluating your options (e.g., not just your fund investment, but also any co-invest positions).
• Early coordination with other core LP stakeholders is key, as is understanding those parties’ other interests (e.g., each LP’s broader relationship with the GP, whether individual LPs have personal relationships with members of the manager that may influence decisions, etc.).
• We have found that coordinated LP action often results in negotiated outcomes that benefit all parties.

Ultimately, proactive planning, transparent communication, and a thorough understanding of your governing documents are the keys to successfully navigating end-of-term fund situations. These situations are highly fact- and relationship-dependent, and early engagement with experienced counsel can make a meaningful difference in outcomes. If you are navigating an end-of-term fund situation or anticipate one on the horizon, we encourage you to reach out to our team for a confidential discussion tailored to your specific circumstances.