Private Eye: ILPA may weigh in on sharing of SEC exam findings with LPs

The Institutional Limited Partners Association by early next year would like to produce a revised set of recommended LPA terms that will likely address how forthcoming general partners should be with the sharing of SEC exam results. The association has a parallel initiative under way to streamline the wording of select provisions, such as distribution waterfalls.

First released in late 2009, and touted as a way to better align LP-GP interests, the ILPA Private Equity Principles amounted to a roadmap for LPs looking to secure favorable terms and conditions in partnership negotiations. Among its recommendations, ILPA suggested that LPs negotiate a European-style distribution waterfall, to ensure that they receive at least all contributed capital back before the fund manager takes carry, and that they keep all transaction and related fees charged to portfolio companies. Some 300 organizations, including many influential LPs and GPs, have endorsed the principles, although that doesn’t mean they support each individual recommendation.

A revision featuring changes to its GP Clawback recommendations came out in early 2011, and Jennifer Choi, managing director-industry affairs at ILPA, said that the Private Equity Principles are “long overdo for a refresh.” Having gathered feedback from members over the past year, the association would like to appoint a working group by May to begin forging a second revision.

Choi said that the next edition would reflect the fact that since 2012 private equity firms with more than $150 million in assets have had to register with the SEC as investment advisers. They will also take into account implementation of the AIFMD governing private equity activities in the European Union. Here are four areas likely to be addressed in the revision:

  • Sharing of SEC findings: In the course of an examination of a private equity firm, the SEC may discover problems that warrant sending a deficiency letter noting areas where firms could improve their compliance operations, or communications with investors. That raises questions for investors. Should the fund manager proactively share with them such letters or similar communications? Should they be provided on request? The next revision of the Private Equity Principles will likely recommend some level of sharing. The association “always comes down on the side of transparency,” Choi said.
  • Fee and expense disclosure: Since 2011 ILPA has released a number of GP reporting templates, including one for capital call and distributions and one for quarterly reports, both rolled out in 2012. Earlier this year, responding to growing calls for transparency from investors, the association also introduced a template for reporting fees, expenses and carried interest. The next revision of the principles is likely to refer specifically to the adoption and use of these templates.
  • LP Advisory Committees (LPACs): ILPA expects to revise the section in the Private Equity Principles describing the responsibilities of the LP Advisory Committee. It’s too early to say what direction the revision might take. But Choi noted that advisory boards have been getting bigger to accommodate growing interest by investors in having seats. One question likely to be addressed by the working group: Have LPACs in practice been able to meet their objectives as described in LPAs?
  • Capital-call lines of credit: As reported earlier by Buyouts, ILPA has started to produce a set of best practices in the use of capital-call lines of credit — loans that GPs use to purchase companies before replacing them with money drawn from investors. The loans have become a source of controversy with some investors, who fear that GPs use them to manipulate returns. The revised Private Equity Principles aren’t likely to come out for or against such loans. But they may recommend limits on how long the loans should remain in place, and on how much information LPs should receive on the impact the loans have on fund returns.

Meantime, according to Choi, ILPA since June has had a related effort under way, called the LPA Simplification Initiative. A working group of some 50 fund attorneys has begun tackling some of the more complex, fraught areas of LPA terms and related documentation. Depending on the subject, their results could take the form of everything from an analysis of commonly used provisions, to the recommended wording of model provisions, to (in rare instances) full-blown standards. By the end of the second quarter, the working group would like to propose a streamlined version of subscription agreements. Other areas that the group has an eye on: key-person clauses, distribution waterfalls and indemnification provisions.

Said Choi: “There’s abundant room for making these provisions easier to understand for the non-legal professional who’s working on these documents day in and day out.”

Action Item: Find the 2011 version of the Private Equity Principles at

Image of Sherlock Holmes courtesy Ostill/iStock/Getty Images