Despite fundraising slowdown, LPs battle ‘silly’ LPA terms

This is probably a perennial complaint with LPs: GPs are becoming overly aggressive with the terms they are trying to push into LPAs.

And I’ve been hearing it again lately, which is interesting considering the fundraising environment. At the same time that fundraising has slowed to levels not seen since right after the global financial crisis, some GPs are pushing hard to infuse their fund LPAs with terms many LPs consider obnoxious.

How does that make sense?

Check this out: “We have seen a few funds get aggressive with main fund LPA terms that say they can force LPs into continuation vehicles. We have said ‘absolutely not’ and have successfully removed these provisions when we see them in LPAs,” a large public pension LP told me recently.

“It feels like a constant battle pushing back on grossly one-sided LPA terms lately. Even with the difficult fundraising environment, these types of silly terms find their way into draft agreements,” the LP said.

This LP blamed the lawyers – and they have a point. It’s really the fund formation folks who come up with new ways to get around stuff, or try to streamline processes that make life easier for sponsors. But at the same time, LPs seem to lose little bits of the small portion of control they have in the relationship.

A big example of this was GPs trying to codify in LPAs ‘pre-clearance’ of GP-led deals. Under certain circumstances, a single-asset secondary could be considered pre-cleared from having to go through the LPAC consent process, and move right to the election period.

I’ve heard that one large firm was able to actually get that term in a fund LPA (hit me up if you know who!), but LPs have almost universally pushed back. The term does not seem to be one that will be market standard any time soon.

We’re also hearing that LPs are now asking GPs to guarantee their no-fee, no-carried interest co-investment won’t be ‘dragged’ into a continuation fund years down the line, with reset fee and carry terms.

LP concern is rising as the popularity of GP-led deals explodes, as more fund investors than ever seek co-investing rights, and as more co-investments than ever before are showing up as part of secondaries deals. We’ll be exploring this issue in greater depth soon.

As always, LPs wield the biggest cudgel; they can simply not commit to a GP’s new fund. The most blatant manifestation of an LP’s leverage is its ability to ignore a GP, according to one consultant I spoke with.

“If it’s egregious terms, if it’s lack of alignment around co-investments, if it’s ‘drag’ rights into CVs – an LP will bring that up in negotiations, and they’ll ask, and if they don’t get it, they’ll move on. Either you accept it because you want the type of return you’ll get from that GP and you’re willing to accept it, or you’re like, ‘Guess this wasn’t meant to be,’ and you find another viable option,” the consultant said.

Too much of that kind of action and a GP (very slowly) goes away. The industry doesn’t even need tough new SEC rules for that kind of regulation.

What are you seeing out there? Has the battle over terms escalated? How are you dealing with it? Hit me up at cwitkowsky@buyoutsinsider.com or find me on LinkedIn.