What’s your ILPA score?

We’ve all heard both fund managers and investors refer to the Institutional Limited Partners Association’s set of private equity ‘principles 2.0’ as a best practice ‘guideline’ or ‘starting point for discussion’ in LP-GP negotiations.

While many of those who’ve endorsed the set of principles have been hesitant to call it a check-list, noting one size doesn’t always fit all, it seems LPs are increasingly keen to score potential GPs based on ILPA compliance. 

About a year ago ILPA uploaded to the members-only section of its website a tool that allows LPs to quantify a limited partnership agreement’s adherence to its principles. ILPA executive director Kathy Jeramaz-Larson told PE Manager the tool was gaining recognition with LPs, and that it is likely to be made public this year. The San Diego City Employees’ Retirement System for example has already instructed its investment team to begin using the tool when reviewing fund agreements. 

Fund managers can obviously react to the tool in a few different ways. However GPs that have publicly endorsed the principles – a group that includes heavy hitters such as The Blackstone Group and Kohlberg Kravis Roberts – should primarily view the tool as an opportunity to objectively demonstrate their support of ILPA’s promoted terms and conditions. In contrast GPs more inclined to downplay the meaningfulness of their “ILPA score” should at minimum be prepared to discuss with investors why the tool shouldn’t be a deciding factor when committing capital.

To help facilitate those conversations, GPs should get familiar with how the tool works. Any measurable ILPA principle is included in the software program, which asks users (usually with the help of their lawyer) to rank the partnership agreement’s alliance with each specific principle. For example, one step asks users to rank what obligations a GP has to present conflicts of interest to the LP advisory committee for review, with one being “only material conflicts presented” and a top score of five being “all conflicts presented”. According to ILPA, each principle is weighed based on its importance, meaning a fund’s waterfall structure for instance will be more influential on a GP’s final score relative to the availability of an escrow agreement. A full breakdown of each principle’s weighting however is not yet available to non-ILPA members.  

What really gives the tool value though is the ability of investors to compare a GP’s score against other funds hosted confidentially in ILPA’s database. Users can break funds down by investment type, size and strategy to review how their fund’s ILPA score stacks up against the mean score of anonymous funds with a similar make and model.

Complying with ILPA’s principles however will never be a hard science – Jeramaz-Larson in fact stresses the weighting of the principles is not necessarily aligned with any given LP’s own governance priorities. Nonetheless LPs have been given a more objective (and arguably easier) way to compare and contrast fund opportunities based on their allegiance to ILPA principles. For GPs, that can be either something to embrace or eschew.