Implications of Proposal. Examining the proposed recycling amount relative to both NAV and original commitments is recommended, as it provides an indication of the significance of the additional capital deployment. Additionally, if the amendment is not approved, will the potential write-downs/write-offs result in meaningful impairment to the overall value of the fund? In certain situations, the potential to generate incremental value from the recycling may be outweighed by the risk of investing additional capital.
Intended Use of Recycling Proceeds. Does the proposal put more of the fund at risk by “throwing good money after bad?” Not all companies will succeed in these difficult times and, as a result, it may be advisable to ask the GP for a detailed plan specifying which portfolio companies will receive additional capital and how they plan to make use of such capital. That said, too many restrictions placed on a GP may in turn hinder the GP’s ability to be nimble in this environment.
Playing Offense, Defense, or Both. Does the GP intend to use additional capital purely to cure breaches of debt covenants, or will the capital be used to make add-on acquisitions at attractive prices? Given the fluidity of the current situation, many GPs are looking to do both, but understanding a GP’s strategy will help evaluate the potential implications of the incremental capital on the fund’s performance and/or tenure.