Institutional Limited Partners Association publishes revised Private Equity Principles

In September 2009 the the Institutional Limited Partners Association (ILPA) published its first "Private Equity Principles" (Principles.1). These were developed to encourage discussions between Limited Partners (LPs) and fund managers and general partners (GPs) regarding the terms and operations of private equity funds. Principles.1 were built around three core guiding principles - alignment of interest, governance and transparency. After extensive discussions and feedback on Principles.1 a further updated version was released in January 2011 (Principles.2). In June of this year a further iteration (Principles.3) has been published, which builds on Principles.2 and reflects evolving industry concerns. Click here to access a copy of Principles.3.

New developments

Principles.3 in many ways builds on and refines Principles.2. However, there are some interesting developments which serve as a weather-vane for current LP concerns. These include:

  • more attention to the impact of liquidity/capital call facilities, reflecting their increasing prevalence. Suggested terms (some of which were prefigured in specific ILPA guidance in 2017) include:
    • Preferred returns to run from the date of draw down from the facility rather than the date of a capital call, thus reducing the scope to use this type of facility to boost returns;
    • Prior fund and ongoing reporting date to be presented both with and without the effect of such facilities; and
    • greater transparency on the impact of such facilities on management fee calculations, leverage limits and costs;
  • ILPA have returned to their original Principles.1 proposal that carry clawback be gross of tax. In Principles.2 they had, after extensive industry feedback, accepted that this should be net of tax (although recommending actual tax rather than the more typical approach of an assumed rate). This continues to be an area where there is consistent GP pushback, so it will be interesting to see how the ongoing debate develops.
  • a continued focus on appropriate expenses, with LPs urged to "be vigilant" and with GP travel costs remaining a noted point of concern. Particular recommendations include:
    • travel and other deal sourcing costs before a deal emerges to the termsheet stage to be for the GP;
    • technology, cybersecurity and software upgrade expenses that "solely or chiefly benefits the GP, and can be utilized over multiple funds over time" to be borne by the GP; and
    • regulatory compliance costs at the management company/GP level or remedial actions as a result of regulatory review to be borne by the manager/GP;
  • recognising the increasing trend for sales of stakes in GP groups, a call for proactive disclosure of changes in GP ownership and transfers of the GP fund interest (even where not restricted);
  • detailed proposals for conflict management and transparency in the case of GP led secondary transactions, again reflecting the increase in such transactions; and
  • on LPAC composition GPs are urged to consider diversity of institutions and opinions. It is noted that
An LPAC composed entirely of the fund's largest LPs may lack the representational diversity of perspective on certain matters.

This guidance, of course, may be harder to sell to those large LPs seeking representation......

How should GPs and LPs respond

The ILPA Private Equity Principles are not intended to represent a checklist to be satisfied. In particular ILPA recognises that:

Each partnership should be considered holistically. A single set of preferred terms and practices cannot provide for the broad variability of products, strategies and investor preferences across the market at any time, not account for every individual circumstance.


  • GPs will do well to be mindful of the points raised by Principles.3. Where GPs feel it appropriate to depart from the recommended approaches, they should ensure that they can articulate their reasons clearly and provide helpful examples of how, in practice, their proposed approach will nonetheless operate fairly; and
  • LPs will want to review Principles.3 and consider whether they wish to update their own internal guidance on points to query.