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FRM Part II · FRM Exam Part II · Private Markets Investing

A limited partners advisory committee (LPAC) is asked to approve a GP's proposal to sell a portfolio company from Fund II to a newly raised Fund III managed by the same GP, at a price set by the GP's internal valuation team. Which action best addresses the conflict of interest?

The best action is to obtain an independent fairness opinion or third-party valuation and have the LPAC, with conflicted members recused, approve the price. The GP is on both sides of the trade and earns fees and carry in each fund, so independent pricing and informed consent are needed.

  1. ARequire an independent fairness opinion or third-party valuation and have the LPAC, with conflicted members recused, approve the priceCorrect
  2. BApprove the transaction because both funds share the same GP, so no party is disadvantaged
  3. CAllow the GP's internal team to set the price provided management fees are waived for the quarter
  4. DReject all cross-fund transactions regardless of price or independent review

Explanation

A GP-led cross-fund transfer creates conflicts because the GP sits on both sides and earns fees and carry in each fund. Independent pricing plus informed LPAC consent with recusal of conflicted members is the standard governance response. Common GP does not eliminate the conflict, and a fee waiver does not fix price bias.

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