Who should pay the adviser fee on a GP-led fund revamp?

Who should pay the adviser fee in a GP fund restructuring? Thats a question that came up in a recent interview I had with a secondary professional. The question is, who hires the adviser and where does the advisers fiduciary duty lie, with the GP or LP, or both?

Ive often heard that paying the adviser varies from process to process — many times it falls to the fund. But Ive also heard that the new investor or investors will pay for the adviser. But the issue is that the adviser is, or should be, working on behalf of the GP and the LP.

Its not uncommon for the GP to have a bit more sway over the adviser relative to the other LPs, this person told me. The critical role the adviser plays in these to make sure theyre balanced and fair and its the advisers responsibility to make sure LPs arent getting fleeced.

This function is so vital that in some rare situations, fund LPs have brought in their own adviser. Its hard for me to imagine an efficient, cost-effective fund restructuring that involves two advisers attempting to work together. Have you heard of situations that involved two advisers? How did that work?

Institutional Limited Partner Association recommends LPACs should have all relevant information necessary to assess potential situations and, if necessary, get the support of independent professional advisers. This is especially valuable in highly complex deals with the potential to overburden the LPAC, or when the GP failed to consult with the LPAC on the adviser selection and compensation, according to ILPAs best practices.

The issue for many LP organizations like public pensions is the more information they get about a deal, the harder it could be for them to make a decision. They dont have enough resources to be able to handle a flood of information from say, several GP-led restructurings in the portfolio.

The SEC also has taken special interest in this part of the process, this person said. Weve heard for years that the SEC has been scrutinizing fund restructurings, but only one I can think of actually led to any sort of SEC enforcement.

This process also highlights the importance of an engaged and informed limited partner advisory committee. Generally the LPAC is there, made up of the largest or most significant investors in a fund, to receive periodic updates from GPs and to hear the most important requests — amendment requests and of course these sorts of proposals.