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Alternative Market Briefing

Other Voices: Management fee - you are always on my mind

Monday, March 30, 2020

By: Robert Seber, Vinson & Elkins

This Q&A attempts to answer some questions that may be on the mind of private equity sponsors who are nervous about the reactions of their LPs to the current crisis.

Can our LPs terminate our fund?

You need to check your fund agreement. According to the most recent MJ Hudson survey, 58% of private equity funds permit a majority or supermajority of LPs to terminate the fund. In most cases, though, the termination right may only be exercised after a standstill period (e.g., two years) following the final fund closing. If the fund has already made investments, it would be unwise for the LPs to force a liquidation of the portfolio at depressed values.

Can our LPs terminate or suspend the investment period?

You need to check your fund agreement. According to the same MJ Hudson survey, only 26% of private equity funds permit a majority or supermajority of LPs to terminate or suspend the investment period. Any termination or suspension would result in a step-down of the management fee. If your LPs do have this right and you are concerned that they may organize to exercise it, we recommend that you are proactive and consider the options we outline below.

Can LPs refuse to fund capital calls? Can they involve force majeure?

Generally no. Fund agreements typically excuse LPs from participation in specific investments based on regulatory, tax, or ERISA prohibitions or limitations, but not for general economic o......................

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