The investor-friendly terms and conditions guidelines that were drawn up in 2009 by the Institutional Limited Partners Association (ILPA) were meant by the group to encourage better communication and negotiations among GPs and LPs. The Private Equity Principles aimed to standardise and simplify reporting, with the ultimate goal of creating consistency, accuracy and expediency in partnership financial reporting.
Demonstrating that the guidelines were a work in progress, the trade group recently released an updated version of its Private Equity Principles that included more information about carry clawback best practices and expanded context around the purposes of key guidelines.
The revisions to the guidelines were all part of the plan, explains ILPA executive director Kathy Jeramaz-Larson. “The first set of guidelines was issued in 2009 and it was indicated at this time that ILPA was not finished,” says Jaramaz-Larson. “The new round came about after we were soliciting GPs that were unable to comment on the first round. We had a roundtable meeting in
February last year with GPs and LPs and out of that we were encouraged to take the ILPA’s
Private Equity Principles and get more explicit about expectations.”
She adds: “The need for LPs and GPs to better communicate about expectations and practices is still there and the guidelines are really meant as a way to spark dialogue about terms.”
Private equity GPs have certainly felt the effect of the guidelines’ dissemination: many of them have spent the last year negotiating with LPs who have started showing up at meetings with the ILPA guidelines in hand.
Considering the popularity of the guidelines among investors, big name private equity firms began to endorse ILPA’s principles.
Apollo Management, Coller Capital and Hermes Private Equity are a few firms that have supported the principles. In total, 140 industry organisations have thrown their weight behind the principles.
In March, Kohlberg Kravis Roberts lent its support to the Private Equity Principles. The news comes at a time when KKR is currently courting investors for its 11th flagship North American fund, which is targeting between $8 billion to $10 billion.
For KKR, however, neither its current nor future funds will adhere to every term on the LP wish list put forth by ILPA, according to a spokesperson. The “endorsement is a commitment of our general support for the efforts of ILPA and other industry supporters to strengthen the basic tenets of the principles with the goal of improving the private equity industry for the long-term benefit of all of its participants”, said KKR’s co-founders and co-chief executives, Henry Kravis and George Roberts, in a statement.
Just as GPs are getting behind the Private Equity Principles, ILPA has released a new set of guidelines. In January ILPA issued the first of five reporting templates to improve “uniformity and transparency and reduce expenses in administering and monitoring private equity investments”.
The first template focuses on capital calls and distribution notices and was developed in consultation with general partners. ILPA chose to tackle capital calls and distribution notice reporting because it was an issue on which both general partners and limited partners asked for help, said Jeramaz-Larson. “[This was an issue] where the industry was looking to create some efficiencies on the LP and the GP side,” she said about the first template.
Reporting – generally speaking, the information a GP shares with its LPs about the fund performance and investments – has long been an area of concern for LPs. Complaints about reporting have ranged from the quality of information the GP provides to the amount of information shared.
LPs enthusiastically embraced the new guidelines as standardisation of reporting would not only help LPs, but GPs as well, says one LP source. “From a GP’s point of view, you get fewer calls from LPs. You shouldn’t have 50 people saying, ‘I need it in this format,’” the LP source said.
For LPs, especially those organisations with small private equity teams, having standardised reporting will definitely ease some pressure, the source says. “Having things standardised makes it easier for smaller teams to understand the information and process it.”
Specifically, reporting around capital calls and distributions is more than just providing the amount of the capital call or the distribution, according to Tim Recker, chairman of ILPA. “The information you need to deal with a capital call notice is more detailed than you realise,” Recker says. “It can be a significant back office headache to appropriately address the information.”
Providing consistency is a good idea, says one GP based in New York. “This is something we’re on board with. It promotes efficiency internally and pleases investors,” he explains. “There’s nothing to complain about.”
Whether GPs endorse the ILPA guidelines or not, any firm hoping to raise money had better find a copy of the amended guidelines and new templates and read them carefully.
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