What LPACs Look For: Navigating Consent in Continuation Fund Transactions

The Limited Partner Advisory Committee (LPAC) plays a pivotal role in continuation fund transactions, often serving as a key checkpoint for conflicts and transparency.

In this article, MoFo’s Private Funds lawyers share insights on the issues LPACs typically consider when asked to give consent—from internal governance practices within U.S. pension funds and institutional investors, to the substantive questions they raise about valuation, fairness, and GP incentives. Drawing from MoFo’s experience advising institutional investors and general partners across Asia and other major markets, we find that there is no single, universally applied guideline or market practice adopted by LPAC members for approving conflicts in continuation fund (CF) transactions. However, some of our observations that may be useful can be found below.

1. Practice Regarding Internal Guidelines

1. Many U.S. pension funds and other institutional LPs have increasingly mature practices but not a specific “rulebook” for approving conflicts as an LPAC member specific to CF transactions. However, some institutional LPs do maintain an internal checklist of key information items they require in order to prepare an internal memo and formulate a recommended position for their management committee or investment committee. Please see Section 2 below for some key issues that an LPAC member may focus on.
2. We have also observed that many sovereigns and funds of funds (FoFs) apply a policy where the LPAC members in their primaries or on their co-investments team may recuse themselves from voting if the institution’s secondary arm is itself participating as a bidder in the CF transaction. In practice, this may reduce the number of eligible votes that a GP may count on to obtain majority LPAC approval (depending on how the LPA is drafted).
3. Finally, some pensions and other institutions look to the ILPA Guidelines for Continuation Funds and GP-Led Secondary Fund Restructurings as benchmarks in formulating their own internal LPAC approval practices for CF transactions, but these benchmarks may not always be applicable and the context of a particular transaction should be properly considered before defaulting to such marks.

2. Key Issues of Focus for the LPAC

Apart from usual concerns regarding transparency, some categories and questions that a GP should consider before soliciting LPAC approvals with respect to CF transactions are listed below.

1. Value Creation Runway and Exit Paths.

1. Has the GP provided a clear value-creation thesis for the asset(s) in question and a valid business rationale for pursuing the transaction?

2. Is there a near-term exit for the asset and has the GP sufficiently explored alternative exit routes, including near-term trade sales or IPOs?

3. Why has the GP determined to undertake this transaction at this stage of the fund’s life?

2. Validity of Pricing.

1. How does the proposed pricing compare to recent direct secondary market comparable transactions?

2. What was the extent and scope of the price discovery process, and were independent advisers appointed?

3. If the LPAC meeting takes place a long time after the valuation/reference date of the deal, are LPs effectively being asked to rely on “stale” pricing?

4. Is there any stapling to another fund sponsored by the GP, and, if so, does this impact or dilute pricing for the CF transaction?

3. LP Elections and Fairness.

1. Are LPs given a genuine choice among selling, rolling over, or maintaining their existing interests in the asset through the current seller fund on the same fee and carry terms? If not, what is the rationale for that?

2. Can LPs retain or roll over their entire stake without incurring any additional cost?

3. Is sufficient time provided for LPs to make an informed election?

4. Are LPs penalized for making one choice over another?

5. Will rollover LPs be treated equitably vis-à-vis new buyers?

6. How will expenses be allocated between selling LPs, rollover LPs, and new buyers?

4. GP Incentives.

1. Is there a strategic reason for the GP to undertake this transaction and has it been disclosed?

2. What are the economic incentives for the GP in undertaking this transaction and have they been disclosed?

MoFo’s global Funds team, including our award-winning Asia practice, is among the most active worldwide. With deep experience across the private funds landscape, we have clear insights into fundraising trends, market terms, and LP priorities. We regularly advise FoFs and institutional investors on fund and secondary investments.

If you have any questions related to secondaries or general fund formation, please feel free to contact our Private Funds partners, Xuanyi Liu (Partner, Singapore) and Serena Tan (Deputy Chair of Global Private Funds, Partner, Hong Kong).