Institutional Limited Partners Association on Thursday released the latest edition of its private equity principles — ILPA Principles 3.0 — that includes a number of updates and expansion of issues including a more complete treatment of fiduciary duty.
The ILPA Principles were first published in 2009 to encourage discussion of alignment of interests in private equity partnerships. The newest edition continues to be centered on the principles of alignment of interest, transparency and governance.
They also include new and emerging topics such as the reasonableness of fees and expenses, subscription lines of credit, co-investment allocations and GP-led secondary market transactions.
One of the most important issues to ILPA members is the reinforcement of fiduciary duties owed by general partners to their limited partners, said Jennifer Choi, managing director of industry affairs.
Limited Partnership agreements should not dilute the GP's fiduciary duties and GPs should not make recommendations that would inhibit the fiduciary duty to LPs, the principles state. The private placement memorandum, a document describing the terms of the securities being offered in the private placement, should "clearly, affirmatively and prominently disclose" the standard of care owed to the fund and the limited partners.
Limited partners should reject provisions allowing the GP to reduce all fiduciary duties as well as clauses awarding the GP sole discretion unless "the LP has sufficient comfort and an attestation that the interests of LPs and the partnership as a whole will not be adversely affected," the principles say. The principles add that this disclaiming language could appear in unanticipated sections of the limited partnership agreement or in other documents.
The newest version of the principles encourages GP transparency by recommending timely notice of such matters as changes in GP ownership; arrangements between the GP and underlying portfolio companies; non-routine interactions with the regulators; material ESG; matters pertaining to the portfolio; and policy violations. What's more, cost and charges disclosures should be "clear, complete, fair and not misleading."
"We have a lot better understanding of the fund economics than we did five or six years ago," said Jennifer Choi, managing director of industry affairs.
For example, the principles state that fees and expenses charged to individual limited partners and the partnership as a whole and carried interest calculations should be regularly disclosed and subject to periodic review by the limited partner advisory committee and certification by an independent auditor. What's more, fees should be reasonable and based on the normal operating costs of the fund and the fund partnership should not be charged for expenses that could be expected to be covered by management fees as a cost of operating the fund.
Greater transparency over the last several years has fueled a discussion among limited partners and general partners as to whether partnerships are being charged fees and expenses that could reasonably be considered part of the management fee, Ms. Choi said.
"We get the sense that there is some cost-shifting going on," she noted.
The principles also provide the fund documents should detail the general partners' policies concerning the calculation, assessment and reporting of fees and expenses charged to portfolio companies.
"Ideally, no fees should be charged to portfolio companies," Ms. Choi said. Any fees charged portfolio companies should be 100% offset against management fees and should be disclosed, she added.