Key questions: Do LPs need to conduct due diligence if they are rolling over exposure to a continuation fund?

The decision regarding how much due diligence to undertake when choosing whether to sell or roll will depend on the internal policies of each LP. “Some may take the view that they have already underwritten the GP relationship and were already exposed to the assets,” says HarbourVest managing director Valérie Handal. “Others may regard the extension of the life of the investment as a discrete new transaction, triggering the requirement to re-underwrite the GP exposure or potentially perform due diligence on the entire deal.”

75%

LPs that say their decision to roll or sell will depend on the circumstances

Source: Private Equity International’s
LP Perspectives 2023 Study

The good news is that the market standard election period now stands at 30 days, giving LPs a guaranteed window in which to conduct any due diligence they choose. “The ILPA-recommended minimum review period is important because for some investors a roll decision is equivalent to making a new decision to invest,” says Capital Dynamics’ head of secondaries, Joseph Marks. “LPs can receive multiple continuation vehicle requests in a week, which can involve a lot of work if that is the case, making that time window absolutely critical.”

LPs will be given the same information by the GP as new investors during this period, in order to diligence the opportunity and determine their roll or sell election. A GP could be subject to legal liability if there wasn’t information parity between buyers and sellers. 

“LPs are provided with an election pack, which is typically a very large document with information on the underlying assets, the terms of the continuation vehicle and the reason why the GP is pursuing this type of transaction,” adds Delphine Jaugey, a corporate international counsel at Debevoise & Plimpton. “Investors will need to read that document in order to make a decision. For some investors, this can be quite challenging when faced with only a month to decide. But LPs are getting increasingly comfortable with the process as it becomes more standardized.”

Although the terms applicable to existing LPs should be succinctly summarized in the election material, perhaps the most important due diligence is reserved for the LPAC involved in the conflict waiver process. “The LPAC needs to dig into the drivers behind the transaction and why it makes sense,” says Debevoise partner John Rife. “They should also make sure they understand what alternative exits the sponsor has looked at and why this is the preferable option.”