A little over a year after the Institutional Limited Partners Association published its guidelines meant to strengthen the alignment in the LP-GP relationship, the guidelines have been extremely successful in “promoting the conversation” between GPs and their investors.
“For the most part, our feeling is the [guidelines] have been supported by the industry,” says Kathy Jeramaz-Larson, ILPA’s executive director.
The purpose of the guidelines, called ILPA’s Private Equity Principles, was to spark discussions about some of the things LPs have been asking for as part of their partnership with private equity managers.
ILPA’s guidelines are not meant to be complied with 100 percent to the letter, Jeramaz-Larson says, nor does the trade association expect LPs to try and enforce all the guidelines in their relationships with GPs.
“No one ever said ‘comply’,” Jeramaz-Larson says. “There’s not one [universal] thing we’ve heard complaints about. It depends on each fund to determine which areas don’t apply.”
Explaining further, Jeramaz-Larson says factors like size of the fund, geography and investment strategy will determine which ILPA guidelines are appropriate. “These things will influence what the final LPA looks like,” she said. “We’re not looking for 100 percent compliance,” she said.
ILPA published its guidelines last year, when the pendulum of LP-GP negotiating power had swung its furthest in the direction of the limited partner. Fundraising had ground to a halt after Lehman Brothers collapsed in the fall of 2008, so LPs who actually had money to commit were in a strong position to negotiate terms.
The guidelines codified what many LPs had been thinking, and even asking for, on a more informal basis for years: ideas LPs have long pursued like cutting back management fees and making sure those fees were not major profit centres for firms; directing 100 percent of deal fees back to the fund; repaying LPs all contributed capital plus a preferred return before GPs begin to receive carried interest.
Over the course of the last year, the guidelines have inspired discussions between LPs and GPs about fund terms and conditions. Many funds that have come to market this year have found LPs looking to negotiate on fees and other terms before making any kind of commitment.
The Blackstone Group, for example, has been working to close its sixth fund for months. The firm expected to close the fund in June, and then September, and is now looking at December for a final close, The fund is expected to reach $13.5 billion, making it the largest fund in recent years.
Blackstone has been negotiating with some last-minute LPs to try to get them in. The Oregon Investment Council was one LP that held out, negotiated and didn’t commit until it got a term change. Blackstone offered Oregon an 80/20 deal fee split in exchange for a slight increase in the management fee. Before the change, the firm shared 65 percent of the deal fee with LPs.
Because Blackstone offered the deal to Oregon, the firm also offered it to every LP in the fund. “We created a special fee structure for Oregon. If we’re lucky enough to get your support [on Fund VI], we will need … as a matter of ethics, to offer it to other LPs,” Blackstone President Tony James to the OIC.
Blackstone’s is just one example of the many times over the past year that LPs have held out on committing to a fund to negotiate better terms. And this does not just apply to new commitments: the California Public Employees’ Retirement System has been negotiating with existing managers to cut fees, and the New Jersey Investment Council, a relative new-comer to the asset class having started its programme in 2005, announced in October it also was negotiating with managers – both existing and new – for fee breaks.
“It’s about supply and demand. New Jersey is looking at getting fees at more realistic levels given the current state of the economy,” a spokesperson for the New Jersey Treasury says.
ILPA has been working on more than fee breaks over the past year. Most recently, the association has been crafting more standardised reporting templates for GPs’ financial reporting to LPs. The templates could be ready in November, Jeramaz-Larson says.
The templates will include new guidelines for capital calls, distribution notices and portfolio company quarterly reports. The goal is to “create consistency, accuracy and expediency in partnership financial reporting”, ILPA said in a statement.