Story of the year: ILPA’s model LPA

The free-to-use template from the Institutional Limited Partners Association is a guide for investors heading to the negotiation table with GPs.

Private equity lawyers might have noticed their workload become a tad lighter since October. The reason? A new “model” limited partnership agreement from the Institutional Limited Partners Association.

The free-to-use template is a guide for investors heading to the negotiation table with GPs. Content is predictably LP-friendly: notable provisions include a clause which mandates that all LPs need to be notified of any co-investment happening; and another obliging GPs to disclose to LPs the identities of all the other fund investors on a quarterly basis.

It’s unlikely GPs were thrilled to see a European-style whole-of-fund carry waterfall within the model LPA. The logic behind this clause was to limit the possibility of clawback and ensure long-term alignment with GPs, which tend to favour a deal-by-deal model. One lawyer who worked as part of the 20-person taskforce on the LPA told Private Equity International this was the provision that took the most internal negotiation.

“We obviously think that’s the best model, because it reduces clawback risk and other issues,” Chris Hayes, senior policy counsel for ILPA, said on a Private Funds CFO podcast at the time. “But we do want to be responsive to the marketplace and our goal in the future is potentially to release a deal-by-deal waterfall down the line.”

Other provisions included:

– A recognition of the GP’s fiduciary duty, including an appropriate standard of care to ensure trust in the long-term GP/LP relationship

– The GP is not permitted to “pre-clear” conflicts of interest in order to ensure LPs’ consent

– Specification that a co-investor should bear its pro-rata share of the fees, expenses and liabilities of a portfolio investment in fairness to the other LPs in the fund

– A requirement for GPs to furnish LPs with a list of all the other LPs in the fund on a quarterly basis, in order to ensure that the partners are aware of who their peers are and so they can adequately exercise their governance rights if necessary

ILPA’s LPA is no silver bullet for investor negotiations and LPs will still be able to pick the terms that work for them. How readily GPs will accept the provisions within may largely depend on the point in the economic cycle – those with oversubscribed funds will feel little pressure to accommodate too many LP-friendly terms. Yet the template is a step in the right direction and, where there is room for negotiation, a widely available model agreement will be useful.