Symbiotic relations

Not surprisingly the reality is that the manner in which GPs interact with their limited partner advisory committees (LPACs) varies greatly. This section will explore best practices for both LPs and GPs with respect to LPACs.

From the GP’s perspective, LPACs serve a valuable function and many GPs have learned to leverage them effectively to assist in the fundraising process as well as the investment, portfolio monitoring and investor relations aspects of their business.

WORKING WITH LPACs 

There are a few, basic dimensions for GPs to consider when contemplating how best to work with their LPACs. GPs need to review the explicit requirements of their LPAs and to determine how best to execute those basic requirements relating to their LPACs. Additionally, GPs would be wise to consider, beyond the explicit roles and responsibilities established in the LPA, what implicit functions they would like their LPACs to perform for them.

From the perspective of the GP, the most basic consideration is how the GP wants to maximise the benefit of consulting and interacting with its LPAC while minimising the burden that providing information and consulting with it creates. GPs’ day-to-day responsibilities of sourcing new opportunities, consummating transactions, managing their existing portfolios and ultimately maximising value at exit must be balanced with the need to interact with their LPACs. There are a number of not-so-obvious benefits that accrue to GPs for the way in which they interact with their LPAC including embracing the spirit of good partnership. Working with LPs through their participation in an LPAC provides GPs with a glimpse into the various LPs’ decision-making processes, key areas of focus in diligence, the type and details of communication LPs prefer and their willingness to solicit and incorporate feedback, which is very important information for GPs.

First and foremost, GPs should consider how frequently they would like to interact with their LPACs. The LPA typically requires one communication/meeting a year. As technology now enables GPs to interact with their LPACs in a variety of ways, the GP should not restrict its view of a traditional ‘meeting’. Emails, video and audio conference calls are preferred by a number of LPs. If a GP is simply informing or updating its LPAC and assuming the need for dynamic, real-time communication is limited, a simple e-mail may suffice. If more real-time dialogue is required, a conference call will prove to be an invaluable tool. Finally, GPs should take every opportunity to engender goodwill and LPAC (and even LP) support by having in-person meetings with their LPACs. Many LPs have expressed a desire to have LPAC meetings during GP annual investor meetings and the practice has become very common to have an LPAC meeting in conjunction with an annual meeting.

In terms of frequency, most LPs have expressed a desire to have GPs ‘err’ on the side of more frequent communication regardless of what type of medium a GP uses. An e-mail will suffice and LPs and GPs alike share that they would prefer more frequent (even once every quarter) interactions assuming the interaction provides substantive and timely updates.

A common best practice is for a GP to use the promise of LPAC membership to encourage an LP to participate in a particular fund closing or to invest a certain amount to be eligible, or both. Basically, the GP may use LPAC membership as a ‘carrot’ in its fundraising. While GPs are very transparent about the arrangement, there is something to gain for both parties. From the GP’s vantage point, it has a key investor participate in a certain close or at a certain investment level which can help with other potential investors if the LP is a respected institution. For an LP, it enables them to develop a much closer relationship with the GP.

From an LP’s perspective, there are a number of considerations for best practices. The convenient and obvious starting point is ILPA’s Private Equity Principles (see boxout). In fact, a recent Probitas Partners survey notes that 65 percent of LP respondents view the principles as ‘useful starting point for negotiations’.

EVOLVING ROLE

The role of the LPAC has been evolving in recent years in response to address three factors: (i) the requirement for increased transparency into the operations of the GP and the fund (driven by increasing emphasis on LPs’ fiduciary duties); (ii) the increasing complexity brought by multi-product firms; and (iii) most recently, the strains of the financial crisis. Keep in mind, however, as the ILPA principles state, the LPAC has no broad governance role in a private equity limited partnership. A number of LPs have shared thoughts on best practices for LPAC meeting follow-up and the ILPA principles provide a thorough discussion of meeting conduct. The GPs and LPACs should use the principles as a starting point for their conduct of a meeting. While there are a number of items that GPs (and LPs) may not want to follow, it is important that the parties discuss and resolve its operating procedures in advance of forming the fund and its LPAC.

LPAC meetings, regardless of whether an e-mail, call or in-person meeting, should yield a minutes report, which the GP disseminates after the meeting. While some official record may be extremely brief, the GP should keep a permanent file of interactions. Some LPs will specifically request through their side letters the right to receive all LPAC meeting minutes, even if they are not members or observers on the LPAC.

In light of the current regulatory environment, there are a number of functions LPACs will likely perform. For example, there are a number of unique situations that have arisen that will require LPAC input. One example is the recently adopted and soon-to be implemented Volcker Rule in the US, which may require certain financial institutions to dispose of assets. While there are a myriad of questions surrounding these potential sales and far too many topics to discuss here, GPs should leverage their LPAC as appropriate during the transition. 

The PEI Investor Relations Manual is out now, available HERE.