The Institutional Limited Partners Association (« ILPA ») is a global organization dedicated to advancing the interests and maximizing the performance of limited partners (« LPs ») in the context of private equity funds. The ILPA constitutes a forum for LPs and general partners (« GPs ») to engage in constructive dialog with respect to alignment of interests, governance, transparency and industry’s best practices.
In 2009, the ILPA published the ILPA principles which are regarded by market participants as the gold standard in respect of the terms, practices and overall management of private equity vehicles. Those principles were recently updated by the ILPA, expanding and clarifying existing industry themes and addressing emerging practices and concerns in the market. Here is a list of key topics addressed in ILPA Principles 3.0 which we believe should be of particular interest for GPs and LPs. For more information about the ILPA Principles 3.0 please read the Bulletin which the authors recently published on the subject by clicking here. For further information on the updated ILPA Principles 3.0, please contact the authors.
- Management Fees. Management fees should be based on reasonable expenses arising from the normal operating costs of the fund. For instance, costs and expenses related to investment activities (i.e. travel, cost of research, computer software, remedial actions resulting from audit or regulatory exam), consultant’s fees, ESG-related expenses, placement agent fees and operating partners’ fees should not be allocated to the fund but be paid by the management fees paid to the GP.
- GP Ownership. GP should proactively disclose the ownership of the management company and notify LPs of any change to such ownership during the term of the fund. Restrictions on any transfer of the GP interest seek to alleviate concerns of misalignment of interest with LPs.
- GP Removal. GP removal without cause should require a supermajority (75%) vote of LPs whereas in the case of a GP removal for cause, LPs should be able to remove the GP upon a preliminary determination of cause, rather than a final unappealable court decision. The GP removed for cause shall also see a meaningful forfeit or reduction of carried interest, to ensure sufficient economics remain to incentivize the new manager.
- LPAC Best Practices. The LPAC should be composed of a workable number of members accounting for investor representation in terms of commitments, type, tax status and relationship with the GP. Furthermore, LPAC should have clear mandates and defined meeting agendas, a rotating chair and greater accountability in terms of participation of meetings.
- Lines of Credit. Credit facilities should be used primarily for the benefit of the fund as a whole and not to fund early distributions. Specifics on credit facilities should be disclosed to LPs and their terms provided to LPs upon request. Regular reporting should include performance information with and without the use of the credit line for comparison purposes.