ILPA 3.0?

When the Institutional Limited Partners Association (ILPA) released an updated set of LP-friendly “Private Equity Principles” in early 2011, the timing couldn’t have been better. Institutional investors were becoming more sophisticated in their GP selection process. Fund managers were facing more hurdles on a crowded fundraising trail. And regulators worldwide had been evaluating GPs’ commitment towards strong governance, transparency and alignment of interests with investors – the three principle aims of ILPA’s “2.0” principles. 

Yet now nearly two years out from their unveiling it is becoming evident some principles may never become industry practice. 

One example is ILPA’s desire for an LP advisory committee to have the unilateral right to hire an independent advisor or counsel – at the fund manager’s expense – should a dispute arise. A number of fund formation lawyers say their GP clients have been largely unwilling to concede this right to investors. Ditto when it comes to providing LPs estimates of quarterly projections on capital calls and distributions, which can be near impossible for most GPs to predict in a meaningful manner. 

ILPA to its credit does not advertise its principles as a checklist for GPs to follow to the letter, but as a starting point in negotiations between fund managers and investors. However if LPs are unable to bargain for some of these suggested terms and practices when the pendulum of negotiation power is in their favour, it may suggest that a “3.0” set of principles offering a more practical set of guidelines is needed.   

A more detailed look at which ILPA principles have been impacting fund terms and conditions can be found in the October edition of PE Manager.