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PE Panorama: Halloween gift for large investors

By Paul Mackintosh  
Nov 4, 2019

Here’s a piece of news that may send shivers up the spine of many a general partner. The Institutional Limited Partners Association (ILPA) on October 30 released what it says is the first publicly available model limited partnership agreement (LPA) for the private equity industry.

Given that the ILPA describes itself as ”the only global organisation dedicated exclusively to advancing the interests of LPs”, this ought to be frightfully good news for institutional investors in private equity everywhere.

I’m not legally qualified to comment objectively on the group’s claims that this is the first such agreement, but I can definitely give some ad hoc opinion on its claims for it. According to ILPA CEO Steve Nelson, the private equity industry has, to date, lacked freely available standardised documents to serve as a model or template for drafting actual GP/LP agreements with the appropriate terms and conditions. “Consequently, the hundreds of LPAs developed each year are the product of bespoke efforts and one-off negotiations that come with excessive cost to both GPs and LPs,” he says.

A cynic might add that those bespoke agreements likely come with excessive opportunity for GPs to skew fund terms in their favour, and deploy all their legal and negotiating muscle to ensure that the final agreement tilts their way. Many pension funds especially are under-resourced and underskilled when facing off against the highly professional, highly funded negotiating teams deployed by GPs. A model agreement of this kind can at least give them some extra ammunition.

What’s more, the 70-page document embodies positions on certain key LPA issues. For one thing, its terms articulate “a comprehensive, Delaware-law based ‘whole of fund’ waterfall”, where the GP fund manager receives their carried interest compensation after each LP gets its returns for the entire fund, rather than after each deal executed by the fund. Public statements by the ILPA indicate it will release a similar model LPA for deal-by-deal structures later. But the fact remains that the industry’s most important LP lobby group has gone out the door with a model returns structure that is highly favourable to LPs.

There are many other important points, including structures that recognise the fiduciary duty of the GP and manager, including “an appropriate standard of care to ensure trust in the long-term GP/LP relationship”.

When it comes to actual agreements, GPs will still have plenty of muscle to push or tailor things in different directions. But GPs collectively are a little short on moral capital right now to dispute the positions taken in the agreement. Billionaires versus pensioners? Who should the law favour?