Private equity fund restructuring can feel like cracking a tough code, especially when investors and fund managers want to keep their numbers strong and the risks low. In this article, we will break down the basics of private equity fund restructuring in plain language: how to do it and what comes after. For other topics we haven’t covered, consulting a private equity lawyer is your next step.
What does it mean to restructure a private equity fund?
Private equity fund restructuring means changing how the fund is set up or managed. This can include:
- changing the fund’s legal structure
- updating the way profits are shared
- adjusting how decisions are made
- switching from one legal structure to another
“Private equity fund restructurings are most often undertaken later in the life of the fund, typically to provide additional capital, change management or otherwise reset the terms,” says James O’Shea, partner at Davies Ward Phillips & Vineberg LLP. “These transactions can take a number of different forms, depending on the purpose of the restructuring and what the sponsor and investors are trying to achieve.”
The main goal of restructuring is to help the fund work better for both investors and managers, especially if the current setup is not meeting everyone’s needs. Other reasons for restructuring a private equity fund include:
- changes in the market
- new rules from regulators
- to attract new investors
- requests from investors for different terms
In other words, restructuring happens when the fund has trouble reaching its goals or when investors want more protection in case something happens.
To understand private equity fund restructuring, it is also important to discuss how private equity works. Watch this video to learn more:
You can also check out this article to find out how to start a private equity fund in Canada.
How to restructure a private equity fund: step by step
Restructuring is not just about fixing problems; it can also help a fund grow, attract new investors, and prepare for new investments. The process involves lawyers and financial experts who make sure all changes follow Canadian laws and protect everyone involved. Above all, every step should be clear and agreed upon by the fund managers and investors.
O’Shea, who works for Davies’ Toronto office, says that the steps involved in a restructuring will depend on its type and the objectives of the sponsor and investors. Here are the steps to private equity restructuring, according to O’Shea:
- Setting the goal: Generally, it is advisable to first clearly set out what the end goal is (e.g., provide additional capital to one or more investments, provide liquidity to investors, reset the economics, or perhaps all of the above)
- Analysis of the fund: Once the end goal has been articulated, the structure and existing fund documentation should be carefully analyzed to determine the most efficient way to achieve the end goal within the fund’s existing framework
- Investor engagement: After this has been determined, there is typically some form of investor engagement to negotiate the terms of the restructuring and obtain any requisite consents under the governing documents, and/or get “buy-in” more generally for the restructuring and plan for the portfolio going forward
In addition to what O’Shea says, below are the steps in private equity fund restructuring:
- Consult legal and financial experts
- Review the fund’s current structure
- Identify the need for change
- Draft new agreements
- Get investor approval
We’ll discuss these steps below.
To help us understand how to change a fund’s structure, here’s a video that explains how private equity funds are structured in the first place:
Want to learn more about private equity fund restructuring? Reach out to any of the best private equity in Canada as ranked by Lexpert.
1. Consult legal and financial experts
First off, lawyers and financial advisers must be engaged early on to help plan the upcoming changes. These professionals make sure that the new structure follows Canadian laws and keeps the fund tax efficient.
For sure, they can:
- advise on legal implications during and after the restructuring
- estimate the costs, both financial and those affecting investors, that the restructuring would have
- assess whether the restructuring is likely to have a positive or negative outcome
2. Review the fund’s current structure
Once legal and financial experts are on board, the next step is to review how the fund is set up. Managers and investors both assess how the fund is structured. They check if the current rules, fees, and profit-sharing still work for everyone.
In other words, the fund’s legal structure is reviewed to see if the current setup still works for both managers and investors.
When reviewing a private equity fund’s current structure, there are two factors to look at:
The decision-makers
It is important to analyze who makes the key decisions and how those decisions are made. This includes reviewing the roles of the general partner, limited partners, and any existing committees within the fund.
The agreement
The agreement between investors and the general partner greatly affects the fund’s structure. The terms of the limited partnership agreement must be reviewed, including how profits are shared and how fees are charged.
While this review can be complex, this step helps everyone understand where the fund stands and what needs to be fixed. It also sets a clear starting point for the rest of the restructuring process.
3. Identify the need for change
Next, it must be decided why changes are needed. This could be because of new laws, such as securities laws, new rules from the securities commissions, market changes, or requests from investors.
This part of a private equity fund restructuring may be uncomfortable for some stakeholders. However, it is important to reach an agreement on the issues and set clear goals for the restructuring process.
4. Draft new agreements
After a rigorous review and identifying the problem, the next step is to draft the new legal documents. This sets out the new rules for:
- how the fund will run
- how profits are shared
- who makes key decisions
Private equity lawyers usually prepare these documents. Having the right legal counsel ensures that everything follows Canadian corporate and securities laws and that the new agreements protect the interests of both the managers and the investors.
When drafting new agreements, it is important to:
- clearly define the roles of the general and limited partners
- set out how profits and losses are divided and how managing fees are charged
- clarify what happens if a conflict arises between the parties
- include new rules for advisory committees and reporting to investors
- define what happens if a key person, such as a manager, leaves the firm
5. Get investor approval
Just like any other changes in a private equity firm, the limited partners or the investors must approve the new structure, as laid down in the new partnership agreements.
Once the new agreements are ready, it is shared with all the investors. They are given enough time to review the changes and ask questions. Depending on the fund’s existing rules for restructuring, a set number or percentage of investors are required to agree before any changes to the agreements and the structure can take effect.
Getting investor approval is important because it protects everyone’s interests and helps build trust. The fund managers can explain the reasons for the changes and how the new structure will work. This can also involve the other committees, such as an advisory committee, if there’s any.
After restructuring, the fund continues to report to the investors through the general manager. These regular updates keep everyone informed regarding the changes and spot new issues early on.
Example of a private equity fund restructuring
Applying all these steps, here’s an example of how to restructure a private equity fund:
Imagine a private equity fund in Canada (let’s call it PEF X) that has been running for several years. PEF X was set up as a limited partnership, with a general partner managing the investments and several limited partners providing the capital.
Over the years, some investors want more control over how decisions are made, while other investors also want changes to how profits are shared. On the other hand, the fund managers also noticed that new rules from the provincial securities commission (e.g., the Ontario Securities Commission) could also affect how PEF X operates.
They all decided that it is time to review PEF X’s structure. First, they consulted legal and financial experts to understand what changes are possible and what their impact might be. The experts suggest updating the partnership agreement to:
- give investors more input through an advisory committee
- adjust the way profits are distributed
After confirming that the new setup will be tax efficient and meet all legal requirements, the managers and lawyers draft the new agreements. They share these with all investors and ask for their approval.
Once enough investors agree, PEF X puts the new structure in place and updates everyone on the changes. Regular reports are made to update investors and help PEF X stay on track.
How can lawyers help in restructuring a private equity fund?
Aside from those already mentioned above, O’Shea gave other roles on how lawyers can help in a private equity fund restructuring.
“Lawyers can help sponsors think through the different options that might be available to achieve the desired outcome and what form of restructuring would be most appropriate in the circumstances,” O’Shea says. “This comes not just from analysis of the structure and documentation, but also from experience on similar transactions, issue-spotting, and general market awareness of how peer firms may have dealt with or thought through similar issues.
“Counsel can also play a key role in formulating a successful investor communication strategy, anticipating what concerns may arise, and how to deal with them.”
This is why it is important to have legal counsel even at the early stages of the restructuring.
Private equity fund restructuring: Figures and funds unraveled
Private equity fund restructuring is not just about fixing problems; more importantly, it’s about building a stronger foundation for the future. When funds are restructured the right way, investors can see better returns and fewer surprises down the road.
No one has to navigate the numbers alone. Legal experts who understand private equity fund restructuring can help guide investors and managers through each step. As such, the right legal advice can help keep every step clear and every number in line.
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