The “Model LPA”. No, it is not a car. But it might move the private equity industry forward.
The Institutional Limited Partners Association’s free-to-use ‘model’ limited partnership agreement – a dummy legal contract – will, it is hoped, make it easier and cheaper to negotiate terms and set up a fund. The 70-page document – which embodies the terms described in the ILPA Principles 3.0 – will live on ILPA’s website for anyone to access.
For LPs, the document is designed to be used as a negotiation tool, a training device and as a starting point when working with emerging managers (LPs “can encourage the GPs applying for seed capital in the programme to use the document for raising their funds”, says ILPA).
For GPs who want to position their fund as LP-friendly, adopting the agreement could serve as a useful signpost to investors. Emerging managers, meanwhile, can use the document from the start, save themselves some legal costs and send a signal to LPs that they are serious about alignment.
“All the lawyers are going to be mad,” joked one private equity firm CFO, thinking about the potential hit to billable hours of negotiation.
Let’s state the obvious: this document is LP-friendly. It contains a number of provisions that many managers would not ordinarily go for. There is a clause that mandates that all LPs need to be notified of any co-investment happening, and one that obliges GPs to disclose to LPs the identities of all the other fund investors on a quarterly basis.
The most salient example of its LP-friendliness is the inclusion of the European, whole-of-fund carry waterfall. One lawyer who worked as part of the 20-person task force on the LPA said this was the provision that took the most internal negotiation. ILPA does plan to release another version based on the more GP-favoured, deal-by-deal model in time.
ILPA has had to thread a needle with this one. As an investor organisation it clearly needed to represent the best interests of the LP community. Go too far in this direction, however, and it would be too easy for GPs to dismiss as “not being market”, and therefore not being a “model” at all.
The model LPA won’t be adopted overnight. Fund terms remain a product of supply and demand and an oversubscribed GP will feel little impetus to make changes. Where there is room for negotiation, however, a widely available model agreement will be usefully wielded by LPs.