DealLawyers.com Blog

As continuation fund strategies have become more important to private equity sponsors, the role of Limited Partner Advisory Committees, or LPACs, in policing potential conflicts of interest has grown.  But as this excerpt from a recent Institutional Investor article points out, their role and responsibilities often aren’t clear:

Today, the role of LPACs has become even more important as more managers launch continuation funds, which allow PE firms to hold on to companies by rolling them from one fund into a new vehicle. Most fund documents require LPAC approval for these rollovers — and usually the committee gets 30 days’ notice. But that investor protection provision isn’t in every contract, and it doesn’t always happen, according to allocators.

The Institutional Limited Partners Association (ILPA), which publishes best practices for the industry, suggests that advisory committees avoid pre-clearing conflicts of interest with continuation funds and instead evaluate each strategy. “The proliferation of GP-led transactions has led to more frequent LPAC votes, in my experience,” says John Beil, head of private equity and real estate at Partners Capital, an outsourced chief investment officer.

ILPA, with its landmark guidelines published in 2019, provides other suggestions to manage continuation funds. But the lack of standards in the PE industry, investors say, is creating tension between managers and allocators.

In part, that’s because the responsibilities of the participants aren’t clear. The allocators on an LPAC have no fiduciary duty to other allocators in the fund. In other words, they are not legally responsible for other committee members or other investors in the fund — instead, they are beholden only to their own beneficiaries.

“It’s there to provide some level of governance, but no one on that LPAC has a fiduciary duty of the fund,” says Chris Hayes, a consultant at RedLine Policy Strategies.

The article goes on to point out that because most fund documents require limited partners to agree that the LPAC committee members don’t have to consider their fellow investors’ needs and circumstances, conflicts of interests involving LPAC members can be significant. For instance, an investor serving on the LPAC might also be a lender or co-investor in a portfolio company, a secondary investor or own an interest in the management company.

The article notes that the potential issues surrounding LPACs has not escaped the SEC’s attention. The agency has highlighted the issues associated with LPACs and has said that it plans to focus on the role of LPACs during the coming year.  In particular, the SEC noted in its 2024 Examination Priorities Guide that it intends to focus on “adherence to contractual requirements regarding limited partnership advisory
committees or similar structures (e.g., advisory boards), including adhering to any contractual notification and consent processes.”

– John Jenkins