LP Portfolio Sale versus GP-Led Continuation Fund
A $3bn fund-of-funds is selling a $250m NAV portfolio of 20 private equity fund interests to free up liquidity for a new strategic plan. The portfolio's weighted average age is 7 years, 35% is in funds from 2019-2021 vintages, and the top five positions are 55% of NAV. A secondary buyer offers 85% of NAV with a 20% stapled primary commitment into the buyer's new co-investment vehicle, which charges 1.5% management fee and 15% carry. The fund-of-funds' LPAC must approve because two underlying GPs are also investors in the buyer's vehicle. An alternative is a GP-led continuation fund for the largest asset, a $95m NAV software company, at a 10% premium to the buyer's mark, with a 2% carry and a 1% management fee. The fund-of-funds has a 10-year life ending in 18 months and a 2-year extension option. The investment committee must choose between the LP portfolio sale and the continuation fund.
1. Evaluate the 85% NAV bid with the 20% staple. How should the LPAC assess conflicts and value?
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The 85% NAV bid is a starting point, not a valuation. The LPAC should require a fairness opinion and compare the bid with recent secondary pricing for comparable vintages, the portfolio's mark quality, and the top-five concentration. The 20% staple is a conflict because the buyer is requiring new money to acquire the old portfolio. The LPAC should separate the two transactions and calculate the net economics: a 20% staple on $250m NAV is a $50m commitment to a vehicle charging 1.5% management fee and 15% carry. That new fee stream can offset the apparent discount or shift value to the buyer.
The two underlying GPs who are investors in the buyer's vehicle should recuse themselves from the LPAC vote. The LPAC should ask whether the stapled vehicle is optional, whether the buyer would bid without it, and whether other buyers were approached. Approve only if the process was market-tested, the fairness opinion supports the price, and the staple is optional or reduced. Otherwise, the LPAC should reject the bid or seek a higher price.
2. Compare the LP portfolio sale and the GP-led continuation fund on liquidity, cost, and alignment.
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The LP portfolio sale gives immediate liquidity and a clean exit, but at 85% NAV it crystallizes a 15% discount and may require a staple that consumes new capital and adds fees. It also sells the top five positions, which are 55% of NAV, at a blended price that may undervalue the best assets. The sale is simple and final, but it may not maximize value if the portfolio is near an inflection point.
The GP-led continuation fund keeps exposure to the largest asset, potentially at a 10% premium to the buyer's mark, but it extends the fund's life beyond the 18-month remaining term and requires a related-party approval. It creates a new 1% management fee and 2% carry, so the cost is ongoing. Alignment depends on whether the GP rolls its carry, commits new capital, and resets the fee basis. If liquidity is the priority, negotiate the sale price up or reduce the staple. If the software asset has strong growth and the GP is aligned, a partial continuation with a stapled secondary and a reduced fee may be better. Do not compare headline prices without adjusting for fees, carry, and time.
3. What process safeguards would you require before approving either transaction?
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Require an independent fairness opinion and a valuation from a third party not paid by the buyer. Run a market check or go-shop for the portfolio. Have the LPAC review the transaction with conflicted members recused, and disclose all fees, carried interest, staple economics, and indemnities. Give LPs an opt-out right if they do not want to roll into the continuation fund, and set a minimum commitment threshold so the transaction does not close without sufficient support.
For the continuation fund, require an independent valuation of the software asset, a GP commitment of at least 5-10%, a carry reset, and a clawback. For the sale, require a clean exit with no undisclosed liabilities and confirmation that the staple is not a condition of the bid. Use an ILPA-compliant process with a 30-day review period and a written rationale for the chosen option. Without these safeguards, reject the transaction or seek a better price.