ILPA principles seeing ‘tremendous traction’

Preferred terms and conditions put forward by the LP trade association are increasingly finding their ways into partnerships, especially terms for deal fees and governance.

Limited partner-friendly terms and conditions put forth in the ILPA Private Equity Principles are gaining “tremendous traction” in the market, according to a source close to the senior members of the Institutional Limited Partners Association, which created the guidelines.

The ILPA Principles, unveiled last year, suggest a host of private equity partnership terms and conditions that the members of ILPA believe best align the interests of limited partners and general partners. The principles have received mixed reactions in the private equity market, with some GPs openly supporting them and others privately claiming they are unreasonable and may amount to investor “collusion”.

The source said recent fund term negotiations by members of ILPA had led him to believe that key recommendations of the principles were gaining broad acceptance. “There is a lot of positive momentum to improve the GP-LP relationship,” he said.

This momentum is especially notable with regard to terms on governance, reporting and transparency, the source said. He also said a key priority for LPs – the use of transaction fees to offset management fees – was increasingly being met with shifts partially or fully toward 100 percent offset agreements.

“Lots of funds have moved to 100 percent offset,” he said. “This is both first-time funds and funds [from established GPs] that have recently closed.”

By contrast, terms governing the level of the management fee “haven’t seen big movements”, he said. The ILPA principles do not call for specific management fee levels, but recommend that these fees, typically charged as a percentage of capital under management, should match the operating costs of the firm, and not serve as creators of wealth for the GPs. “I think the principle we are looking for is an alignment where the GP is rewarded through capital gains,” the source said. “It’s hard for anybody to argue against that. But we want [the GP] to attract and retain the best people. We’re not putting the screws to them.”

With regard to governance terms, “almost all GPs have made improvements”, he said. These improvements have come in the form of escrow provisions designed to guard against the need for a GP “clawback” at the end of a fund’s life. There has also been a trend toward improvements in reporting and transparency, as well as the creation of limited partner advisory committees as defined in the ILPA principles.

A key aspect of the LP advisory committee is the requirement for regular “in camera” sessions, in which LPs discuss fund issues without the GPs being present. This term in particular is gaining acceptance, the source said.

The source said he has been pleased to see a number of GPs form committees “to do self-examinations” on to what extent their funds conform to the ILPA principles.

The source stressed that the principles are meant to guide improvements in the alignment of interests between parties to a limited partnership. “No one expects anybody to be 100 percent” in compliance with the principles, he said.