Q&A with ILPA’s Jennifer Choi: ‘Pick your spots, know yourselves, know your priorities’

Jennifer Choi, managing director of industry affairs for the Institutional Limited Partners Association, shares advice for smaller LPs and thoughts on fee transparency, and discusses recent and upcoming ILPA initiatives.

Jennifer Choi

How do you think smaller LPs, one- to two-person shops and the like, should be navigating the investment landscape as demand for private equity exposure continues to grow?

Based on the strategies for success that a lot of our smaller members employ, I think it’s crucial to know your organisational priorities and where you will play well in the market, both in terms of getting allocation but also in erecting relationships with GPs that feature strong alignment of interests. In short, pick your spots, know yourselves, know your priorities. When our smaller LP members can be important to the GP, the relationship and the alignment are inevitably stronger. That will sometimes correspond to the size of the fund, and sometimes to the maturity of the franchise.

How do you see the conversation around fees evolving over the coming year?

We continue to see elevated interest among LPs for greater transparency and consistency of presentation of information around costs. LPs are requesting the ILPA template on fees, expenses and carried interest, and even where they’re not successful, they continue making that ask. Moreover, LPs that are now receiving more consistently presented information, are now contemplating how best to utilise that data, both to make better investment decisions internally as well as to achieve enhanced monitoring of their portfolio.

ILPA has been busy in 2019 with the recent release of the model LPA and principles 3.0. What feedback are you getting from the market on these initiatives?

Industry response has been phenomenal, and very positive. We tried to be as transparent as possible about our intentions for both the Principles and the Model LPA, and had realistic expectations as to the impact on market practices. But in the last few days alone, I’ve heard from several of our members and some GPs that the ILPA Model LPA is entering the conversation during fund negotiations. We’re delighted to hear that it’s recognised as a value-added resource.

What’s on the horizon for the coming year? Any major initiatives that the team is working on at the moment?

We at ILPA like to keep busy, and we have several initiatives in motion at present, which we believe will deliver value to our members and the industry. First is an aggregated set of resources for the LP community around integrating ESG into their investment processes. When it comes to ESG, there’s no one size fits all, so we set out to identify a roadmap and associated resources that could be useful for different LPs as they move along their own ESG path.

We are also drafting follow-on recommendations tied to our 2017 guidance on subscription lines of credit, specifically on standardised disclosures to LPs. We believe this will spark an even more transparent conversation about the impact that subscription lines of credit have on the presentation of fund performance.

Last but certainly not least, there is some really wonderful work taking place now around diversity and inclusion across the industry. At ILPA, a task force of our members is creating a framework for both LPs and GPs that identifies an array of specific actions and related resources to support the implementation of diversity and inclusion initiatives. The resulting toolkit of resources will touch on recruitment, retention, culture, training, policies, and evaluation of diversity and inclusion initiatives. The framework and toolkit will be made available in early 2020, and we will build on it over time to recognise the worthy efforts taking place across the industry globally to advance diversity and inclusion.

What are the Model LPA and Principles 3.0?

ILPA released its Model LP agreement on October 30. It is the first publicly available legal template to attempt to set the standard for alignment of interests between GPs and LPs.

Based around Delaware law, the Model LPA is a “whole of fund” waterfall LPA which “addresses a persistent and shared need of GPs and LPs to reduce the complexity, cost and resources required to negotiate the terms of investment in private equity funds”, according to the organisation’s October 30 release. The guidance was developed by a group of approximately 20 counsellors, internal and external, to the ILPA who represent GPs and LPs in the fund formation process.

The Model LPA follow’s ILPA’s June 27 publication of Principles 3.0, which are intended to be a “road map” for fostering transparency in the private equity industry. ILPA released its first iteration of Principles in September 2009, and the revised Principles 2.0 was published two years later.

This latest set adds discourse around new and emerging topics including fee and expense reporting, scope of fund audits, subscription lines of credit, co-investment allocations, notifications and policy disclosures, changes of ownership and control, and GP-led secondaries.

ILPA’s principles are built around the thesis that “sound practices and their impact on the health and reputation of the private equity industry are the shared responsibility of both limited and general partners”.