Situations where funds managed by the same GP are transacting between themselves inevitably lead to conflicts of interest as each vehicle may have different investors and therefore different interests. Such conflicts are typically difficult to resolve and therefore in most circumstances are unlikely to be acceptable to LPs.
That said, there may be exceptional circumstances where such transactions can be countenanced, for example where it is the right time for one fund to exit (for example, because it is at the end of its life cycle), but where there is still future value which can be created in the investment and where there is a strong case that the manager is uniquely placed to deliver such value. In these circumstances, there will be conflicts of interest that need to be carefully managed and disclosed. Importantly, the price and warranties to be provided, if any, and the conditions attaching to them need to be defensible to both the buying and selling fund’s investors.
The sale of investments between funds operated by the same GP is generally not recommended as it leads to significant potential conflicts of interest.
In cases where such sales and/or co-investments between funds are contemplated, GPs should ensure that they discuss this transaction at the earliest opportunity with the relevant LPACs for the funds, the transaction is handled in accordance with the fund documents and that the LPs in both funds are made fully aware of the transaction. The GP should strictly adhere to the conflict management provisions set out in the fund documentation and also its own internal conflict management policy.
Whenever considering such a transaction, a GP must be able
to demonstrate that no fund has been preferred at the expense of another (for example, by arms-length negotiation or obtaining an independent valuation of the investment). Teams acting for each of the funds should either be separated, subject to appropriate information barriers, or GPs and LPs should be made aware of any potential conflicts of interest with regard
to a common representation.