January 28, 2010
Private Equity LPs Seek to Impose “Best Practices”
In his “Private Equity Law Review” Blog, Geoffrey Parnass recently wrote:
The Institutional Limited Partners Association, a trade association that represents 220 institutional investors in private equity funds, recently published a set of Private Equity Principles, designed to guide future dealings between its members and the private equity sponsor community. The Association’s members include public and corporate pension funds, endowments, foundations, family offices and insurance companies with more than $1 trillion in private equity funds under management. The publication of the Principles is the first time that a group of influential limited partners has collectively published a set of core requirements for private equity fund documents.
The Principles were developed by the Association and its members to “correctly align” the interests of private equity sponsors and institutional investors in private equity funds. The concepts reflect “suggested best practices” that should shape the private equity industry in the future. Among the best practices endorsed by the group, it is significant to note that no change in the basic 80/20 profit split is recommended. The Principles say this split has “typically worked well to align interests”.
What comes up for scrutiny and criticism are provisions relating to carried interests, claw back liabilities and management fees. In particular, the Principles urge tougher provisions on carried interest escrow reserves (a 30% escrow), a 2-year repayment of claw back liabilities, tougher provisions on the size and application of management fees, and the payment of all transaction and monitoring fees to the fund rather than the GP or other sponsor affiliates.
See Geoff’s blog for a summary of these Principles…