ILPA Issues Guidelines
An effort to formalize best practices in private equity underscores a more vocal limited partner community
September 9, 2009
The Institutional Limited Partners Association unveiled a set of guidelines for the private equity industry, billing the effort as a drive to better align the interests of LPs, sponsors and portfolio companies.
The ILPA, in the 15-page document, focused on best practices involving governance, transparency, and the partnerships. Taken in the context of the current environment, the effort would also seem to underscore the push by limiteds to be more vocal in pressing their rights with sponsors.
In July, for instance, Norwind Capital was reportedly forced to backtrack from an investment after its LPs, according to a story in Pension & Investments, blocked efforts to launch a platform in the fertility space. The publication identified Harvard and Yale as the limiteds in question and noted that style drift was the reason cited.
Even the outperformers are dealing with more vocal LPs. TA Associates wrapped up its latest fund at $4 billion in August, well ahead of its target, but the firm made some concessions in the way of lower carried interest (20%) and a provision that redirects transaction fees to offset limited partner management fees.
The ILPA, meanwhile, listed a number of principles designed to guide limited partner and sponsor discussions. Many of the items reflect current issues facing both GPs and their investors. For instance, the ILPA noted that changes to the tax law that personally impact members of the general partnership “should not be passed on to limited partners in the fund.” This, ostensibly, looks out to potential changes to the tax treatment of carried interest.
Also, another suggestion targeted clawbacks, stating that these provisions “must be strengthened so that when they are required they are fully and timely repaid.”
Moreover, the ILPA guides GPs to maintain a “substantial equity interest” in the funds, taking the form of cash, and suggests that all transaction and monitoring fees should “accrue to the benefit of the fund,” which is in line with the modification made by TA Associates.
The ILPA also discussed governance and transparency best practices, which hearkens on past efforts from the association and other similar organizations to create a boilerplate approach for reporting performance and calculating fees.
Calls to the ILPA for comment were not immediately returned by press time.
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