Sleeping giant begins to stir

As a group, the Institutional Limited Partners Association, or ILPA, have an estimated $1 trillion tied to the private equity asset class, and last year committed roughly $80bn to private equity funds. Put another way, by some estimates ILPA is responsible for 80 per cent of all capital commitments to private equity funds. One would assume that such a group, like the proverbial 800-pound gorilla, would be able to get whatever it asked for. But ILPA, despite providing the capital backbone of the private equity industry, lacks a cohesive voice on critical issues like transparency, valuations, reporting standards and partnership terms ? issues near and dear to the hearts of anyone who commit capital to private equity funds.

Over the past year, however, ILPA has started getting serious about the role it intends to play in the private equity market. In fact, industry observers now foresee a day when ILPA will wield considerable influence over the way private equity partnerships are put together and monitored. When, or if, that day arrives, general partners who wish to raise capital from ILPA members will have to ?get with the programme? or risk seeing their funds go vastly undersubscribed.

The coffee club days are over
ILPA is a trade association comprised of roughly 100 major institutional investors that have private equity programmes. Most members hail from the US and Canada, though ILPA is increasingly drawing members from Europe and Asia. In fact, calling ILPA a ?trade association,? until recently, would have been a bit of stretch. ILPA's twice-a-year meetings typically were more akin to glorified coffee clubs ? informal gatherings where professionals who manage private equity portfolios would chat and compare notes. The roaring mid- to late 1990s, it must be remembered, was not a time during which limited partners had much say over how the private equity market worked. As institutions clamored to gain entrance to hot private equity funds, LPs basically accepted whatever terms and business practices were handed down by GPs. Talk at ILPA meetings more often than not focused on how well everyone's portfolios were performing, and how lucky they all were to have access to such great funds.

Those days are very much over. Now, even the most revered private equity names are having trouble attracting capital, and this has caused the pendulum of power to swing toward the LPs.

ILPA has chosen this moment to act. As a start, the former coffee club is beginning to look like a bona fide trade association. Last October, the group announced the election of its debut executive committee ? Frank Fernandez, the senior portfolio manager for alternative investments at the Florida State Board of Administration, is vice-chairman; Jeff Sharpe, the head of alternative investments at Lockheed Martin's pension, is secretary; Mark Barnard, the director of private investment for the Howard Hughes Medical Institute, is treasurer; Pamela Harris-Jenkins, a senior investment manager for BellSouth's pension, is membership director; and Kevin Kester, the director of alternative investments for Colorado's public employee pension, is programme director.

But the highest-profile member of ILPA, and the person most responsible for its transformation from loose-knit club to formal trade organisation, is its chairman-elect, Rick Hayes, whose day job just happens to be overseeing the largest private equity portfolio in the US As the senior investment officer of the alternative investment programme at the $150bn California Public Employees' Retirement System (CalPERS), Hayes is uniquely positioned to see the problems associated with being a limited partner and to call for change. For the time being, all ILPA-related activities are being organized out of Hayes' Sacramento, California office.

Over the years, Hayes has frequently spoken about being dumbfounded as to why limited partners in private equity have no formalised process for communicating with each other, while almost every other asset class has a well-organised trade association affiliated with it. In 2000, Hayes decided to transform ILPA into the conduit for communication among institutional limited partners, as well as a vehicle for change in the industry.

Setting the agenda
Although ILPA now bears the structure of a wellorganised trade association, it has yet to decide on a specific agenda. That next step may soon arrive though, as ILPA's executive committee is currently working through the finer points of the group's mission statement, according to a source familiar with the matter.

Among the issues to be addressed by ILPA will be standardised reporting, or rather, the lack thereof. Limited partners receive quarterly reports in a dizzying array of formats, which necessitates hours of data entry and prevents any convenient side-by-side comparison of fund performance. CalPERS, for example, receives approximately 200 reports every quarter in as many different formats. Many investing institutions are forced to hire a full-time staff member just to deal with these reports.

Beyond reporting standardisation, ILPA may push for changes that will make private equity a far more transparent asset class. Hayes has said that he would like to see greater communication between limited partners about fund performance. In other words, it may someday be a standard aspect of the due diligence process for potential investors to contact the existing limited partners of a GP group to ask for a candid assessment of that group's investment skills.

ILPA's potentially biggest challenge may be getting private equity firms to adopt common standards of valuation, but if any group has the heft to pull this off, it is ILPA. As the world economy has soured and public markets swooned, the thorny issue of portfolio company valuation has come to the fore. When asset values were constantly rising, few LPs took notice of how the underlying assets in their private equity portfolios were being valued. With values coming down, however, many LPs find themselves confused about the worth of their private equity holdings. This problem is exacerbated when a fund's management fee is based on the value of the portfolio companies. A number of limited partners even found that GP groups continued to hold struggling portfolio companies at cost while others funds wrote down, or wrote off, the values of those very same companies which they too were invested in.

How hard will ILPA push?
Although a standard system of valuation would bring greater credibility to the private equity industry, many GPs would argue that such standards are impossible to apply meaningfully across the broad universe of industry sectors and investment styles. How hard ILPA pushes on this issue will depend on how much its members buy that argument.

Of course, the issue of standards is not a new one to private equity investors in Europe, where differing tax and legal systems make standardisation all the more desirable. The European Venture Capital Association (EVCA) has released published ?guidelines? for valuations and reporting (The British Venture Capital Association (BVCA) has released a similar, but not identical, set too). To date, only a handful of larger European private equity firms have adopted the voluntary guidelines, but market insiders expect the broader private equity market to gradually follow suit.

Not surprisingly, the push for valuation and reporting guidelines at the EVCA and BVCA coincided with those groups opening up their memberships to limited partners. ILPA, on the other hand, is an LP-only organisation. In fact, its members are eager to create a space for themselves that excludes marketers, service providers or GPs. From that may emerge a united front against what many LPs feel has been a market structured to the maximum advantage of GPs. But the ILPA has its work cut out ? before it pushes its agenda on the private equity industry, it must first define clearly what that agenda is. Anyone who has attempted to build consensus in a large group knows what a challenge that can be.

David Snow is the editor in chief of, a New York-based web site providing news and information on the private equity industry.