Who should pay GP restructuring fees?

There’s an aspect of a recent restructuring deal that is ticking off some limited partners.

Irving Place Capital is restructuring its third fund, a $2.7 billion, 2006-vintage that had about $1.1 billion of unrealized value as of September 30, 2014.

Park Hill Group is running the deal – helping to structure the transaction, organizing LPs for voting, lining up buyers and producing reams of documentation, among other things. No one has a beef about Park Hill getting paid for its work, but some LPs I spoke with are annoyed at having to shoulder the bill. They want to see the GP or the buyer pay the tab.

Irving Place declined to comment about the deal.

In a restructuring deal, “you either get to take this cash or I give you something that kind of looks like what you own, but it’s not really what you own, and you get to pay the advisory fee for it,” said a secondary market buyer. “It should be absorbed by the buyer.”

Another secondary market source argued that the GP should pay the fee out of the balance sheet or future management fees. “The GP is the one getting the big win out of this,” said the source. “If I was a major LP in one of these deals, I would absolutely push back on paying the fee.”

However, two sources said who pays the intermediary fee ultimately doesn’t matter because it all evens out in the transaction. If the buyer pays, the fee will be reflected in a slightly lower offer price, they said. If the manager pays, the fee may come out of the proceeds of the deal, slightly lowering the amount the new investor has kicked in for new investments and to buy old LP stakes.

“Who pays the economics is an academic point – at the end of the day the fee comes out,” said a secondary intermediary.

Perhaps it’s more about perception. If you’re an LP in an aging private equity fund, you’ve been paying a manager a fee for a long time. The fact that a restructuring is necessary likely indicates something has not exactly gone right with the fund, as well-performing funds don’t need restructurings.

And so here you are, an LP 10 or 12 years down the line, with a manager who has not closed the fund in the time frame promised (even including one or two extensions). You as the LP don’t have many options. And now the GP is giving you a choice – you can sell out of your LP interest at a certain price, or you can roll with the GP into a new vehicle to house the existing portfolio, on reset terms. Those are your two choices – on top of which, you’ll be paying the advisor for running the deal.

That doesn’t seem fair.

One LP tried to put it into perspective: This is a solution for LPs that want liquidity. Having the two choices is better than having no choice.

Still, some LPs would prefer a third option – to do nothing. They simply want the GP to do what they promised, manage out the portfolio and maximize value for everybody. Even in the face of dwindling management fees and perhaps with the possibility of no carried interest. That’s what happens when GPs underperform: They have to work for scraps. Because that’s what they promised to do, not charge the LP yet again for a venture that has likely only led to headaches.

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