Exiting a Venture Capital Fund Allocation
On March 1, 2010, Dr. Susan Mangiero, CEO of Investment Governance, Inc. sat down to talk to financial and strategy expert, Mr. Pascal Levensohn. In this eighth question of ten, read what this Investment Governance, Inc. Advisory Board member has to say about exiting from a venture capital ("VC") fund. Click here to read Mr. Levensohn's impressive bio.
SUSAN: What happens if a limited partner ("LP") wants to exit a VC fund? What are their rights?
PASCAL: The options here are limited. The LP can try to sell its interest, including the obligation to fund future capital calls, to a fund that acquires secondary interests. The good news is that a robust market exists for such interests in venture capital partnerships today. Alternatively, an LP can default. If the LP does wish to sell, the general partner ("GP") needs to approve the transfer. The standard partnership agreement language leaves this decision in the "sole discretion" of the GP. There is no free lunch if you change your mind several years into a 10-year-plus partnership participation. And there shouldn't be. This means that either the secondary market buyer will take his or her pound of flesh by buying the LP's interest at a substantial discount or the GP will by offering the interest and its economic value on a discounted basis to the other LPs. It is far less disruptive to the GP and to the GP-LP relationship for the exiting partner to sell to a secondary buyer but these buyers are totally financially driven and are going to get the best deal possible for themselves.
