The Institutional Limited Partners Association (ILPA) Private Equity Principles first appeared in 2009 when the global financial crisis was taking its toll on all financial markets (public and private, equity and debt). After a moment of virtual standstill following the Lehman Brothers bankruptcy and AIG bailout, market participants began to assess not only the damage caused, but also to reassess the opportunities and risks of making any new investments as well as the existing rules governing such investments.
Contrary to certain doomsday predictions, the private equity limited partnership structure (the established governing model of private equity funds in the US, UK, Germany, and many other jurisdictions), unlike some other asset classes (asset-backed securities, for example) proved to be robust and generally the industry emerged from the crisis with limited damage.
Nevertheless, there remained a deep sentiment in the limited partner (LP) community that some of the fund terms of the pre-financial crisis years significantly favoured general partners (GP) as a result of a GP-friendly fundraising environment, and, therefore, had to be scaled back to fulfil the industry’s objective that funds should be longterm partnerships aligning the interests of both fund managers and investors to deliver superior returns. The power pendulum in the negotiation of fund terms had begun to swing from GPs to LPs post-financial crisis.
Particular areas of examination included whether existing fee structures were providing the right incentives and alignment of interests between GPs and LPs, whether common investor protection rules were able to deal sufficiently with crisis scenarios, and whether the level of transparency provided in the past would be sufficient to make LPs comfortable with investing in private equity funds in a post-crisis world.
The arrival of the ILPA Principles was not coincidental to this. Rather they were a direct consequence of changing LP attitudes towards certain fund terms. This article assesses the impact of the Principles on the negotiation of fund terms among fund managers and investors, and the part they have played in influencing and shaping limited partnership agreements (LPAs). It summarises the reassessment of the GP/LP relationship following the global financial crisis, the appearance and evolution of the ILPA Principles from version 1.0 to version 2.0 (analysing the latter in more detail), covers various standardisation initiatives (such as reporting and fee templates), and offers an outlook on industry developments and regulatory factors that are likely to shape the negotiation of fund terms in the coming years — at a time when the power pendulum is swinging back in the fund managers’ court (at least for the most successful ones).
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This article was first published in: Private Equity International (PEI), The LPA Anatomised, pp. 57-77, February 2018