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The rationale that is usually given to LPs to make them go along is that the time to exit is not right, but the one fund that currently owns the interest is get

by pevey 4y ago

The rationale that is usually given to LPs to make them go along is that the time to exit is not right, but the one fund that currently owns the interest is getting long in the tooth, so they need to move the interest to the newer vintage year fund. They spin it as, we thought it was a good investment before, and we think it is an even better investment now, so we want to hold onto it. But we still need to wind down the old fund. It's a nightmare from a valuation standpoint, because while many LPs may well be invested in both funds, making it a wash, some are not. The LPs that invest in both funds sign a check to fund the investment in the new fund, and then get the money back as the older vintage is winding down. The investment just essentially gets rolled forward. The investors who are only in the new fund are cashing out the previous investors, so this is much more of a concern. But they are new and still usually riding the feeling of wow, they let me invest in this awesome fund. PE firms are really good at creating an aura of exclusivity and luxury. A rolling loan gathers no loss. So long as the music keeps playing, valuations can be whatever number you can get your auditor to agree to. Nice dinners and event tickets for your audit partner can help with that.

_uy6i 4y ago
Except I think in the case where I’m an LP in both funds I potentially pay an incentive fee in Old fund even if the value defines dramatically in new fund, so still could be bad for me
- pevey 4y ago
  This is true, it cashes out the carried interest as well, so if the new fund closes with a lower valuation for that investment, the investor was screwed out of more carried interest than should have been paid.
collegeburner 4y ago
It's not a "right time" argument, I've seen people place these and they're usually pitched that this is a "real winner" and there's a bunch more growth left if they stay invested. That's why they're moving towards single-company funds. And sometimes they're right tbh. And tbh there would be some other LPs cashing out the previous investors if the company was sold normally. The only LPs who take this risk are the ones who buy into the new fund. And if they're worried they should just check the GP commit, if it's thin then obv they're just pulling fees so don't invest. Some of the continuation funds the GPs actually believe they have a really good investment and they increase their commit as a %. And the increasing valuations you describe are literally the same as the public markets the past few years. No bribing audit partners required.

by pevey 4y ago

_uy6i 4y ago

Except I think in the case where I’m an LP in both funds I potentially pay an incentive fee in Old fund even if the value defines dramatically in new fund, so still could be bad for me

pevey 4y ago
This is true, it cashes out the carried interest as well, so if the new fund closes with a lower valuation for that investment, the investor was screwed out of more carried interest than should have been paid.

collegeburner 4y ago

It's not a "right time" argument, I've seen people place these and they're usually pitched that this is a "real winner" and there's a bunch more growth left if they stay invested. That's why they're moving towards single-company funds. And sometimes they're right tbh. And tbh there would be some other LPs cashing out the previous investors if the company was sold normally. The only LPs who take this risk are the ones who buy into the new fund. And if they're worried they should just check the GP commit, if it's thin then obv they're just pulling fees so don't invest. Some of the continuation funds the GPs actually believe they have a really good investment and they increase their commit as a %. And the increasing valuations you describe are literally the same as the public markets the past few years. No bribing audit partners required.