Friday Letter: 'You're the only one asking for this'

PEO explores why this line from reticent GPs may no longer deter an LP from pressing hard on fund terms.

A funny thing happens when people within the same profession communicate with each other: they begin to share ideas on how to improve their performances and make their lives easier.

It was therefore only a matter of time before the Institutional Limited Partners Association (ILPA) put down on paper what its 220 members had been sharing behind closed doors: their preferred partnership terms in private equity.

This week, ILPA, whose members control roughly $1 trillion in private equity assets, released its “Private Equity Principles”, a set of best practices for LP engagement with private equity fund managers.

The partnership terms recommended by ILPA are unapologetically LP-friendly. As one US fund-formation lawyer noted, “I don’t know who put this together, but it most likely was not general partners.”

ILPA closely polled its members both online and in break-out groups at its annual meeting to come up with its set of best practices in regard to partnership terms, governance, transparency and the LP advisory board.

The principles are not designed to bludgeon GPs into submission, but rather are meant to serve as a “framework for discussion”, says Joncarlo Mark, an ILPA board member who helped move the principles to completion. Mark is better known as a senior portfolio manager in charge of private equity for the California Public Employees’ Retirement System.

Under the proposals, each LP remains free to structure relationships with GPs on a partnership by partnership basis, stressed Mark.

Even if ILPA members do not “gang up” on non-compliant fund managers, the ILPA principles will still be influential in the market, and very likely will move terms further in the direction of what LPs prefer.

For one thing, ILPA is now collecting endorsements of the principles from any market participants that wish to be named as signatories. Next week, for example, the CalPERS investment staff will present to the investment committee board members a proposal for the giant pension to officially endorse the ILPA principles. This endorsement will no doubt be followed by similar moves across the institutional landscape.

This means it’s increasingly feasible there come a day when an LP says to a GP, “I’m sorry, these fund terms run counter to the official policy of my board.”

At the very least, a tried and true GP negotiating tactic will lose some power as a result of ILPA’s foray. LPs who ask for improved terms often are told: “You’re the only one asking for this.” Now, the LP can pull out a copy of the “ILPA Private Equity Principles” and say: “Actually, I’m not.”

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