He’s the head of the only organisation dedicated to serving the interests of limited partners, so the voice of Steven Nelson, the new chief executive of the Institutional Limited Partners Association, is an important and powerful one.
The ILPA Private Equity Principles – a set of best-practice guidelines calling for alignment of interest, greater transparency and strong governance – were first published in September 2009 and have since become a manual relied on by a spectrum of industry participants. As of March, they had been endorsed by more than 325 institutions.
The principles lay out best practice for issues such as carry waterfalls, management fees and expenses, fund terms, fiduciary duty and risk management.
“There are no real leaders in the private equity LP community to say, ‘What should a subscription agreement look like? Should we have more standard legal documents?’” says Maurice Gordon, managing director and head of private equity at Guardian Life Insurance, an institution that as of December had almost $1.5 billion invested in private equity and private equity real estate. Gordon sits on ILPA’s board and chairs its membership committee.
“There are no real leaders in the private equity LP community to say, ‘What should a subscription agreement look like? Should we have more standard legal documents?'”
“Who can do that? Who can figure out what a confidentiality clause should look like? There are no other organisations but ILPA who can do that.”
Nelson stepped into the top job in April, 10 months after it was vacated by Peter Freire. He should know exactly what a subscription agreement or confidentiality clause looks like. A 20-year veteran of Cambridge Associates, Nelson established its investment practice in the Asia-Pacific region, ran its global consulting practice and ended his career there as chief operating officer.
So, what attracts a Cambridge lifer to jump from one of the private equity industry’s most respected advisory names into an association role?
“Much like ILPA, Cambridge sat squarely on the side of the table with the LP,” Nelson says. “That appreciation for the LP perspective and the need for it to have a voice in the industry: that’s an important part of why I made the move.”
In a statement announcing his hire, Nelson described the ILPA mission as “ultimately driving better investment outcomes for our members”.
Did the move impact his salary? Nelson declines to comment: “The opportunity that ILPA represented – the chance to build something here and really scale what is already an impressive organisation – that was the primary motivation, and really everything else was secondary.”
In at the deep end
It was a busy first few weeks for Nelson. His second day featured an ILPA board meeting and his third a meeting on Capitol Hill with the Senate Banking Committee and commissioners from the Securities and Exchange Commission. The objective of that meeting was to give ILPA’s “current assessment of the market” and communicate where it could provide input on the regulatory agenda. “[We want] to make sure they understand we’re eager to do so.”
The follow-up to that meeting was a letter outlining ILPA’s thoughts on several regulatory issues under discussion, including the advertising rule, Form PF, broker-dealer registration for private equity fund advisors, and the custody rule.
“Any regulatory changes contemplated should be considered in this light: what impact will there be on LP confidence in the asset class, and in turn, the continued health of this sector?” Nelson wrote in the letter.
ILPA began life as an informal networking club. “They used to just have a big table, people would show up and you’d go around the table, and then the meeting’s over,” says Gordon, who has been involved with ILPA for 15 years. “It’s changed so much.”
As the spokesman for those members, Nelson has understandably spent much of his first few weeks on the job getting to know them and listening to their concerns.The organisation counts around 450 members, representing more than $2 trillion of private equity assets under management. Its members represent more than 4,500 individuals across more than 50 countries and manage 50 percent of global institutional private equity AUM, according to its website.
So, what did Nelson discover is on the minds of limited partners? First up is the lack of balance in the general partner-LP relationship.
While Nelson concedes “things run in cycles”, and the pendulum does sometimes swing back in favour of LPs, “it’s been a very long run of GPs sitting in a position of relative strength regarding fund negotiations”.
Tied into this is the issue of transparency, which Nelson calls “a perennial concern”. LPs voiced concerns about “access to information, the quality of that information, [and] whether or not its presented in a consistent fashion, both for the individual GP and across GPs”. Perversely, increased regulation around fee disclosure has led to a “kitchen sink” approach that often makes it even more difficult for LPs to understand the fees they will pay over the life of the fund, says Nelson.
“There has been – in response to regulatory compliance considerations – a move towards including everything and anything that might possibly feature over the full life of the fund which in some ways has made it harder for LPs to parse exactly which types of fees and expenses they will incur over the life of the fund,” Nelson says. “It’s not necessarily the case that the information isn’t ultimately provided by the GP, but it can take some more effort for LPs to build that complete picture.”
When ILPA was searching for its next leader, it was looking for “a leader that could be extremely strategic and discerning about where ILPA can be most effective, a leader who understands the complexity of the LP and private equity universe”, says Tanya Carmichael, managing director, global funds at Ontario Teachers’ Pension Plan and chair of ILPA’s board of directors.
“[ILPA looked for] a leader who understands the complexity of the LP and private equity universe”
Membership is growing over 15 percent a year and the organisation is morphing into a more sophisticated platform. This puts it at a critical juncture, says Gordon. “It’s a time when you need somebody like Steve to come in and take a fresh look, to say, ‘Where do we go from here with a high-growth firm? Where do we focus our efforts to take advantage of the opportunities?’”
The diversity of the LP universe means that ILPA’s members will not agree on everything. For example, the increased use of subscription lines of credit – or fund-level leverage – has prompted investor reactions ranging from wholehearted acceptance to vehement opposition. Providing guidance to this disparate group is no mean feat. ILPA held extensive discussions with LPs, GPs and industry advisors and produced a white paper laying out what the association considers to be best practice regarding the use of these lines.
The ability to build consensus is something Nelson has in his toolkit, says former Cambridge Associates colleague David Jallits, now chief investment officer at Chicago-headquartered single family office Duchossois Capital Management. “He tries to get people to agree on something logical that moves the process forward,” he says. “He’s not afraid to be an outlier if he can’t get people to function as a team.”
The next chapter
There will be nothing to shock members in Nelson’s plan for the organisation: instead he will pick up on and develop some of the core areas and themes ILPA has already made headway on. First is networking.
“One of the most exciting initiatives we have underway and the membership base is keen for us to deliver on in very short order is a virtual community, a place where the full membership base can go to share ideas, to connect on issues of common interest,” Nelson says. The virtual community should be in place before the end of the year.
“You can bring the limited partners together now in ways you never could before due to technology,” says Gordon. “The number one thing I and a lot of ILPA members look for [from the organisation] is community and networking.”
Second is growing the in-person education programme, which is currently offered in Chicago, San Francisco and London. However, with the membership base in Europe and Asia growing rapidly, ILPA is weighing up the possibility of creating more in-person opportunities in those regions and virtual learning.
Nelson, a self-confessed travel nut, is no stranger to getting satellite offices off the ground, as his experience in Singapore with Cambridge demonstrates. With the majority of ILPA’s membership growth coming from outside the US, it’s no surprise discussion of an overseas office is on the table.
“It’s something the organisation has talked about for a while, and it remains an active conversation,” Nelson says.
The group is also working on ILPA Principles 3.0, set to be published before the end of the year; “It’s being worked on with members of the GP community,” says Carmichael. “It can’t be an ‘us versus them’ type of dynamic, that’s not constructive.”
In the next year, ILPA will continue to focus on “evolution of what we consider to be best practice”, Carmichael says. This will include ongoing updates to its templates and due diligence questionnaires to cover issues such as diversity and inclusion and a new template focused specifically on standardising portfolio company metrics, Nelson adds.
“It’s been a very long run of GPs sitting in a position of relative strength regarding fund negotiations”
One market development increasingly on LPs’ – and the SEC’s – radars is that of GP-led secondaries transactions. In the last year several high-profile fund managers have taken advantage of the secondaries market to restructure older funds, with that part of the market reaching $14 billion last year, according to data from advisory firm Greenhill.
As with credit line usage, this is an emerging issue that has split the industry both along GP-LP lines, but also among LPs with different agendas.
Evaluating the risks
In February ILPA organised a webinar for its members on GP-led fund recapitalisations as a direct result of LPs’ interest in the issue.
“Our focus has been on how to evaluate the risks associated with GP-led transactions, how to be sure LPs are identifying the right sort of information they should be requesting in order to make an informed decision, and – stating the obvious – being aware of and sensitive to potential conflicts that can exist in those types of transactions,” Nelson says.
“It’s something we’ve spent time on already and I suspect it’s an area where there’ll be more to come.”
The work ILPA did to spell out best practice on subscription credit facilities and highlight the right questions for LPs to ask their managers undoubtedly moved the debate forward and promoted open discussion.
Understandably the guidelines were not glowingly received by every participant in the market; one common complaint among GPs is that any sort of standardisation undermines the idiosyncratic nature of private funds. But the document was not designed to win friends among GPs, so grumbles of “one size not fitting all” do not necessarily hit home. Instead it is about educating LP members.
The assocation is likely to issue guidance on fund restructurings and this, too, probably won’t be greeted with universal warmth. Nelson’s reputed consensus-building reputation, as well as his technical nous, will be tested.