ILPA has published new guidance on continuation vehicles, setting out best practices intended to strengthen
alignment between GPs, existing LPs and incoming investors. The guidance gives representations and warranties
insurance (or warranty and indemnity insurance (RWI)), a clear role in the continuation vehicle process, but also
establishes firm expectations around how it should be used.
ILPA’s view of RWI
ILPA recognises that RWI can provide considerable value in a continuation vehicle transaction. By reducing the
buyer’s recourse against the selling fund and its LPs, insurance can facilitate a cleaner exit, limit liability under the
purchase agreement and allow sale proceeds to be distributed more quickly and with less reliance on contractual
holdbacks.
Insurance may also benefit rolling LPs, including where they are named as beneficiaries under the policy. ILPA
further identifies a potential role for insurance in addressing risks such as LP clawback, although whether this can be
achieved will depend on the particular transaction and policy structure.
However, ILPA is equally clear that RWI cannot compensate for weaknesses in the underlying process. It is not a
substitute for fair pricing, effective conflicts management, appropriate LPAC engagement, balanced disclosure or a
fair election process.
This is significant because insurers will assess the quality and integrity of the continuation vehicle process when
underwriting the risk. A well-supported valuation, clear transaction rationale and transparent election process should make the transaction more insurable. Conversely, a compressed or opaque process, or poor management of the GP’s conflicts, may result in broader exclusions, more residual recourse and increased cost.
What does this mean for secondaries practitioners?
The principal practical points are:
Consider insurance early. The RWI strategy should be developed alongside the transaction structure, diligence and disclosure process. Early engagement with an experienced broker allows the parties to identify the appropriate warranty package, anticipated diligence requirements and any structural or coverage issues before the transaction documents become settled.
Treat process quality as an underwriting issue. Practitioners should expect insurers to examine the
rationale for the transaction, valuation support, LPAC engagement, conflicts management and the fairness
of the sell/roll election. These are relevant to the insurer’s assessment of the underlying risk, particularly
where the GP is acting on both sides of the transaction.
Give LPs a clear summary of the insurance. Election materials should explain the policy’s purpose, the
insured parties and beneficiaries, whether insurance was required by a lead investor, the policy limit,
retention, premium, cost allocation, principal exclusions, known uninsured matters and any residual
recourse against the existing fund or its LPs.
Explain who pays and who benefits. The RWI premium should be disclosed separately and allocated
according to the risk being covered and the parties receiving the benefit. Where the existing fund or selling
LPs bear the cost, the GP should explain why this is fair and provide a cost-benefit analysis against
alternatives such as a contractual holdback.Consider both selling and rolling LPs. Selling LPs should understand how the premium affects their net
proceeds and whether the policy enables earlier distribution. Rolling LPs should understand whether they
benefit from the cover, whether they are named beneficiaries and how the cost affects the amount
reinvested in the continuation vehicle.Identify the limits of protection. The policy should be assessed carefully for exclusions, known matters
and risks that remain outside cover. Insurance may reduce recourse, but it will rarely remove every
exposure.Avoid duplicative protections. If the existing fund is paying for RWI, any additional indemnities, waivers
or “no reliance” provisions should be closely scrutinised and justified where they duplicate the insurance
protection.
ILPA’s central message is that RWI should form part of a well-managed continuation vehicle process rather than
being applied at the end as a means of insulating the parties from an inadequate one.
For practitioners, that makes early engagement, transparency and careful alignment between policy coverage,
transaction documents and cost allocation increasingly important.
The full ILPA guidance is available here.
A PDF version of this article can be downloaded here.
To learn more about how RWI can support your transaction please get in touch with Tan or Guy.
Tan Pawar
Managing Director
Director
M: +44 (0)7341 133 007
E: tan.pawar@bmsgroup.com
Guy Wilmot
Director
M: +44 (0) 7586 766 191
E: guy.wilmot@bmsgroup.com
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