The number of private equity fund restructurings is likely to rise in the coming years. The current economic expansion will inevitably come to an end (at 87 months and counting, this expansion is already the third longest post-WWII) making exits more challenging, just as the terms expire on funds raised during the “golden era” (2003-2007). At the same time, some managers will seek to continue managing certain portfolio assets, by extending the terms of the funds and/or restructuring the funds to bring in new capital and provide liquidity to existing limited partners.
On a simplified basis, a restructuring often involves the manager forming a new fund (with a combination of new LPs and continuing or “rolling” LPs) and the new fund merging with or otherwise acquiring the remaining assets of the existing fund. The influx of new cash from a secondary buyer creates liquidity for some existing LPs to cash out. The purpose of the transaction structure is to give the manager additional time to maximize the value of the portfolio, while providing liquidity to those investors who prefer an immediate exit.