The Factors a GP Should Consider In Assessing The Possibility of Extending The Fund Life
In this article we will understand what the fund extension is and will review the factors a GP should consider in assessing the possibility of extending the fund life.
Funds will typically have a fixed life. Often, the fund documents will provide mechanisms and the terms for extending this life should all investments and any contingent or escrow consideration not be realised by the initial end point. It is important that the fund is managed with these constraints in mind and that any extension period is undertaken to improve the possible return to the LPs when compared to not extending the life of the fund.
Funds that still have assets after their life has expired or funds that have disposed of their portfolio companies and ceased activity before this time will enter a period of liquidation. The operation of this period is governed by law and the details are also often addressed in the fund documents.
Explanation
A fund will typically be “closed ended” and therefore have a finite life. However, it is not always possible to invest, manage and exit from all portfolio companies in the planned fund life. Therefore, in order to maximise the return from the fund to LPs, the fund documents usually provide for the mechanisms and terms to extend the life by a pre-agreed period.
It is also possible for the GP and its LPs to subsequently agree further extensions to the fund’s life although these extensions are not explicitly covered in the fund documents.
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Recommendation
A GP should seek to invest, manage and exit from all portfolio companies within the agreed life of the fund where this can be achieved and is in the best interests of the LPs. Where an extension is to be sought, the GP should seek early consultation with LPs in order to set expectations as to the likely final termination date of the fund and the implication of continuing the fund beyond the initial life, in particular providing further clarity on the expected exit process for the remaining portfolio companies. Where extensions beyond any agreed provisions are proposed, GPs and their LPs should seek to agree the required length of extension, details of revised management fees in the extension period and any applicable terms. The GP should ensure that it has the resources to enable it to continue to manage the fund in the best interests of the LP during the extension period, notwithstanding the revised financial and contractual terms that may apply.
