The private equity market has a zombie-firm problem, and in some cases, chronic misalignment that develops between LPs and GPs can best be remedied by the removal and replacement of the GP team. But how is this complicated and sensitive task accomplished?
James O’Donnell of Gibson Dunn, Joncarlo Mark and Eric Green of Upwelling Capital walk through the full lifecycle of a GP transition — from the early warning signs that a firm is in trouble, through the governance mechanics of building LP consensus, to the practical realities of installing a replacement manager. The conversation makes clear that GP removal is not always about bad actors; more often it’s a function of economic misalignment, deteriorated firm-level incentives, or founder dysfunction that leaves perfectly good assets stranded without competent stewardship.
Key takeaways of this fascinating conversation include:
• LPs are forming teams for problem funds Because zombie and tail-end fund situations consume a disproportionate amount of time relative to their portfolio weight, a growing number of LPs are standing up dedicated special situations teams to manage these risks professionally rather than absorbing them into the general portfolio function.
• Sometimes a good GP should not run a problem investment A GP with a strong track record of sourcing and executing deals is not necessarily the right person to restructure a distressed portfolio — the skill sets are fundamentally different, and conflating them is one of the most common mistakes LPs make when evaluating their options.
• Founders ‘falling out’ creates GP replacement need A significant proportion of GP transition situations have nothing to do with investment performance and everything to do with co-founder disputes — when partners are fighting over the money rather than for it, LP capital is at direct risk and the case for intervention becomes urgent.
• How LPs can look for GP ‘alarm bells’ The clearest warning signs are a combination of a fund underwater and unlikely to clear its hurdle, a manager with no realistic path to raising a successor fund, and deteriorating reporting quality — individually inconclusive, but together a strong signal that the GP’s incentives have fundamentally shifted away from LP interests.
• LPs must proactively get transparency from GPs Rather than waiting until year ten or twelve to act, LPs should establish early rights to communicate with fellow LPs, set proactive information request agendas with their managers, and treat a GP’s failure to answer questions as itself a meaningful data point.
• LP vs LP conflicts are common Once LPs begin organizing around a potential GP transition, they frequently discover that the most intractable conflicts are not with the GP but among themselves — driven by differing exposure levels, co-investment stakes, and debt-versus-equity positions that create genuinely incompatible interests within the LP base.
• How long does it take to remove a GP? A GP removal can take anywhere from several months to several years, and LPs should scrutinize their LPAs at the time of investment for time-limited removal provisions that could expire before a problem is even fully diagnosed.
Access the full transcript and a searchable content library at the Liquid Courage Substack: https://liquidcouragepod.substack.com/p/gp-transitions-when-and-how-to-install
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