Limited partners or investors in private equity could not have had it better. In an environment where access to capital will decide the future of private equity, institutional investors, sitting on huge pools of capital, are setting their own terms to turn things in their favour.
About 10 European and Asian development financial institution including CDC, who invest in emerging market private equities including India, have endorsed the Institutional Limited Partners Association (ILPA) Private Equity Principles (Principles). ILPA, a not-for-profit association, represents the interests of institutional private equity investors.
Released in April this year, the ILPA came out with a set of best practises that could potentially impact the way general partners manage the funds. These recommendations were released after discussions between all the 200 members and an extensive survey of LPs around the globe.
The sweeping reforms recommended that the general partner community should charge moderate management fees and stick to the fund’s investment purpose. Besides, the transaction fees should go to the fund and not to the management company, it says. Also, changes in tax laws that impact general partners should not be passed on to the investors. The guiding principles underscore the need for tighter distribution provisions and avoidance of clawback liabilities (an agreement ensuring that the general partner does not receive performance-based payments (carried interest) in excess of that which was agreed upon.he institutions that have endorsed the ILPA principles are CDC Group, Deutsche Investitions-und Entwicklungsgesellschaft mbH (DEG), IFU, Belgian Investment Company for Developing Countries SA/NV (BIO), Finnfund, Norfund, Proparco, Asian Development Bank, Financierings-Maatschappij voor Ontwikkelingslanden NV (FMO).
A press statement, released by these development financial institutions (DFIs), said, “we believe that the Principles reflect best practice in many areas and support ILPA’s aim to improve the private equity industry for the long-term benefit of all participants, particularly those investing in developing countries.” These DFIs commit significant capital to private equity funds for investment in sustainable private sector businesses in developing countries.
Coller Capital, Hong Kong Jockey Club, Sampension, Universities Superannuation Scheme Ltd (USS), Altius Associates Limited, Avenue Capital Group, CAAT Pension Plan, CDIB Capital and Center for Investor Welfare and Corporate Responsibility, UC Davis are also said to have backed these principles.
Some of these investors like CDC and Asian Development bank have invested in a host of private equity firms in India. CDC Group, the UK government-backed fund of funds with net assets of $4 billion, is probably the most active fund of funds in India. CDC, which primarily backed its emerging markets focused fund Actis, of late diversified its exposure to a host of other India-focused private equity funds. CDC recently announced $250 million investment into two infrastructure and real estate funds in India, and soon after said it would invest $185 million into six PE funds here.
According to a recent report by London-based research agency Preqin, there are about 78 firms from India out on road to raise private equity money. Adoption of such principles by these LPs, who commit to emerging markets, will only add to the woes of PE fund managers, who are already finding it difficult to raise cash in an extremely challenging environment.
Certain measures such as a more hands-on involvement by LPs on investment, sectoral allocation and pressing GPs to have their skin in the game are already being seen in this direction. (GPs will have to commit a certain portion of their carried interest to the overall fund).
The ILPA principles have also called for greater transparency to investors and better fund governance by general partners. For instance, detailed valuation and financial information related to portfolio companies should be made available to investors on a quarterly basis, it notes.
Gone are the days of private equity terms ruling in favour of the general partner class in the economic boom period. All this is just to say that private equity industry including in India is heading for a shake-out.