Institutional Investor Newsletter

1. LPA template developed for Cendana

Cendana Capital, a seed venture fund-of-funds, engaged DLA Piper to develop a template limited partnership agreement (LPA) for emerging venture managers. Cendana regularly invests in managers raising their first institutional fund, a stage at which fund documentation is often underdeveloped. Cendana identified this initial institutional raise as an optimal moment to implement a balanced, investor-friendly partnership agreement and, through this initiative, aims to support emerging managers by offering a template designed to streamline fundraising and reduce legal negotiation.

2. Evolution of equity-only participations in rated product structures

The alternative assets industry continues to see an explosion in rated product structures – including rated funds, rated feeders, and collateralized fund obligations (CFOs) – driven primarily by the desire of regulated investors (such as insurance companies) to gain exposure to new asset classes in a capital-efficient, investment-grade format that offers more favorable risk-based capital treatment than direct equity investments in private funds. As sponsors struggle to find consistent sources of equity-only participants in these structures, equity participants with informed outside counsel are increasingly able to negotiate bespoke and highly favorable terms that can meaningfully enhance the risk-return profile of what is already a levered position in the capital structure. For guidance through such equity participation while the market evolves, please contact a DLA Piper attorney.

3. ILPA turns up the heat on organizational expenses

In May, the Institutional Limited Partners Association (ILPA) released new guidance aiming for sharper transparency and tighter cost control around fund formation, introducing a three-part framework that could reshape expectations for general partners (GPs) and limited partners (LPs). The proposal calls for 1) a hard cap on organizational expenses at the lower of five basis points of assets under management or $10 million, 2) fifty-fifty cost sharing on any amounts above that, and 3) legal-fee transparency, including calling for rate schedules and draft budgets to be shared upfront with LPs. As LPs digest ILPA’s new framework, GPs may wish to prepare for more scrutiny and discussion with investors around fund formation costs. For more, please read DLA Piper’s full alert.

4. Are continuation funds worth their salt?

It looks like continuation funds – when a fund manager sells assets from one fund that it manages to another, instead of selling such assets to unaffiliated third parties – are here to stay. While institutional investors still have mixed responses to continuation transactions due to the questions they pose with respect to conflicts, valuation, and alignment between LPs and GPs, the proliferation and potential profitability of continuation funds signal that they could be the new normal. For more information on the material issues LPs may wish to consider when reviewing a proposed continuation transaction, LPs can review ILPA’s continuation fund disclosure template, released in January. DLA Piper regularly advises its institutional investors on many of the template’s key aspects, from pricing discipline to ensuring real alignment between the parties.