You'll find in the October issue of Private Equity Manager many examples of the difference between theory and practice, written rules and applied policy the letter of the law and the spirit of the law.
Private equity is based on partnerships, which are legal agreements, and therefore it isn't surprising that much energy and time is consumed paying attention to written rules – witness the huge importance private equity work now represents to many law firms.
But private equity is also a people business where the difference between good investments and bad investments usually comes down to human judgment. Similarly the business of running a private equity firm relies greatly on rules and procedures, but also on skilled human interaction.
A perfect example of this interplay between written and unwritten rules comes in the very sensitive, if rare, occasion of an LP default. This month's PEM looks at the policies that some investor relations professionals have pursued when LPs can't or won't honor capital calls. The first step is never the enforcement of stated penalties, but rather the very human process of seeking to understand and accommodate.
Some written rules trump others. Members of a private equity fund's advisory committee are often very aware of a chasm between what an LP board member can do according to the LP agreement, and whathe or she will do in practice. Andy Thomson writes, limited partners on these boards, especially in the litigation-prone US, are often shy about doing what the advisory board was ostensibly set up to facilitate – provide guidance to the fund managers. In fact, writes Thomson,?Many US limited part-ners will not only shy away from discussing certain items once on the board but may well turn down an offer to join an advisory board in the first place.?
In the UK, the world's only regulated private equity market, the absence of written rules causes stress. The Financial Services Authority does not distinguish private equity as a separate beast, and therefore fund managers there must jump through regulatory hoops originally intended for the managers of stock and bond funds. On p. 22, Philip Borel surveys the perplexing state of regulatory affairs in the UK, and its cloudy future.
All this, plus language that must never appear in your PPM (see p. 24).
Enjoy the issue,