b'ILPA PRIVATE MARKETS EDGE Q1 202112 13Top of MindTOP OF MINDLP INSIGHTS PROGRAM: HOT TOPICS SPACs - What LPs ILPAs LP Insights Program is a systematic effort to connect one-on-one with representatives of every ILPA memberShould Knoworganization to capture the most pressing issues, challenges and opportunities associated with being an LP. In 2020, ILPA conducted over 200 LP Insights conversations, leveraging those exchanges to generate actionable research for the exclusive use of the ILPA membership. The industry has been abuzz on SPACs, read on for a high-level summary of what ILPA thinks members need to know. Formerly a seldom used financing tool, SPACs explodedtodirectingallappropriateinvestmentopportunitiesto onto the scene in 2020. USD 82 billion was raised throughthe fund during the investment period. LPs should review SPACs in 2020, a six-fold increase from 2019.investment restriction clauses in LPAs to ensure potential LPSPACs have enormous potential to increase liquidity andinvestment opportunities are appropriately directed to the Manager SelectionTechnology privateequity-backedbusinessesareanaturaltarget.fund, not an alternative vehicle such as a SPAC.SPACs SPACs create another route for portfolio company exits,OtherConflicts:TherehavebeenexamplesofaGP-and Evaluation and this is generally a positive development for LPs andsponsored SPAC merging with an existing fund portfolio GPs alike.company.Inthesecases,theconcernsforLPsarevery NumerousGPshavebegunraisingtheirownSPACsorsimilar to a traditional cross-fund investment. LPs should areactivelyconsideringthemasanoptionbecauseofaskGPstoprovideafairnessopinionfromanoutside the beneficial economics of SPAC sponsorship. GPs canadviser to validate that the portfolio company has been differentiate themselves in the SPAC market by pointingappropriately valued. LPs should refer to the Cross-Fund to their track record of sourcing and diligencing privateInvestments section of the ILPA Principles and ensure these Commitmentcompanies, making it easier to raise capital. processes are run fairly. StandardizationSize andPriority TermsDespite the increased interest in SPACs by GPsor perhapsPotential Benefits to LPsandPacing and What tobecause of their fervormany LPs are uncertain about theBoth LPs and GPs can share in the economic benefits of Automation Ask For potential implications when a GP elects to sponsor a SPAC.the SPAC. There have been instances of GPs raising SPACs Points of Consideration for LPs inside of the fund as a portfolio company. In these situations, the fund acts as the sponsor and pays for the formation of Notification Rights: In many instances, GPs have decidedthe SPAC. The GP then solicits investors, finds the company to raise SPACs without notifying their existing LPs, muchwith which to merge, and when the deal is completed the less consulting them. LPs should consider reviewing thefund shares the profits (i.e., 20% of the stock of the merged notification rights granted to them within LPAs and sidecompany). Members who raised manager selection mostMembers who raised technology most oftenletters. Additionally, LPAC members should consider beingFundsthatpursuePrivateInvestmentsinPublicEquity often mentioned: mentioned:proactive in asking GPs about their intentions regardingbenefitfromimmediateliquidity.SPACsponsors SPACs during LPAC meetings.sometimeslookforadditionalcapitalorleverageto Virtual due diligence Look-through to portfolio company level KeyPersonandTimeandAttentionClauses:SPACscomplete a deal alongside the SPAC. In this case the GP Impact of COVID-19 restrictions Understanding valuations economics could potentially be greater than those of thecan offer a Private Investments in Public Equity to invest Leveraging technology Streamline systems and processes GPs existing fund(s). This may incentivize the GP to devotealongside the SPAC. In certain circumstances, the GP may The new normal Capture and track data more time and resources to the SPAC. The ILPA Principleslook to the fund for additional capital. This would allow the Evaluating new managers Reliance on MS Excel recommend that key persons should devote substantiallyfund to gain significant exposure to the merged company, all their business time to the fund. LPs should review timewhich will be listed on themarket and provide immediate AsmembersstrugglewithmanagerselectioninaAsmembersseektoleveragetechnology,ILPAhasand attention clauses in LPAs and key person clauses toliquidity.However,PrivateInvestmentsinPublicEquity remote environment that will extend well into 2021, ILPAcontent to help:ensure that key investment personnel are covered. If a GPinvestorscomeintothemergedcompanyondifferent has resources to help:The2020ILPAIndustryIntelligenceReportonLPdecides to sponsor a SPAC, LPs should inquire as to whoterms than the SPAC sponsor. If faced with this situation, ILPAsTownHallonCOVID-19sImpactonPETechnologyprovideshigh-levelrecommendationson the GP team will work on the SPAC and ensure that theLPs should consider employing an advisor to ensure that Portfolios and LP Operations. Watch the Town Hall oron acquiring and implementing technology.fund is receiving the appropriate resources.the terms of the deal are fair and that GPs act in accordance read the event summary. Later in 2021, ILPA will release technology landscapeInvestment Restrictions: When sponsoring a SPAC, the GPwiththeirfiduciarydutytothefund.Formoredetailed ILPAsWebcastonWorkingFromHomeasanLP.documents that will provide an overview of majormay have overlap between the types of companies theinformation on SPACs consult a recommended academic Watch the Webcast or read the event summary.technology providers in private equity. Contact NealSPAC is targeting and the funds stated investment strategy.research article by Klausner, Ohlrogge and Ruan, entitled Prunier at nprunier@ilpa.org for more information. The ILPA Principles recommend that the GP should commitA Sober Look at SPACs.'