WISHLIST
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--Transaction fees to accrue to the fund
--General partner should have major equity stake in fund
--Management fees should not be excessive
--Fee, carried interest should be subject to independent audit review
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The private equity ecosystem may be in for some serious shakeup. In a move where limited partners (investors) are clearly calling the shots, the Institutional Limited Partners Association has come out with a set of best practises that could potentially impact the way general partners manage the funds.
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The sweeping reforms recommend 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).
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Some of these ticklish issues may have come to the fore with private equity terms ruling in favour of the general partner class in the economic boom period. The recommendations, based on an extensive survey of LPs across the world, perhaps attempts to tilt the balance back in favour of investors.
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Not only this, the suggestions also call 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.
ILPA executive director, Kathy Jeramaz-Larson, said, the document was released after discussions between all the 200 members and an extensive survey of LPs around the globe.
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“Our role is not to force the principles on either institutional investors or general partners but we believe it is in the best interest of both groups to study, understand and, where feasible, adopt the principles,” she said, in an interview with the Wall Street Journal.
