Canada: ILPA Principles 3.0: Back To The Future?

Key Takeaways for Private Equity Fund Sponsors and Investors
Last Updated: September 23 2019
Article by Brooke Jamison, Sarbjit S. Basra and Stephen Dalby

In June 2019, the Institutional Limited Partners Association (ILPA) published a third version of principles that set out ILPA's view of industry best practices (ILPA 3.0). ILPA 3.0 contains several recommendations regarding the ways in which fund sponsors should structure their funds to ensure a greater alignment of interests between funds and their investors. Some of these recommendations represent a departure from current market standards.

Fund sponsors that are expecting to raise a fund in 2019 and beyond should become familiar with ILPA 3.0 and the ways in which their fund terms may represent a departure from ILPA 3.0. Conversely, institutional investors may also want to familiarize themselves with ILPA 3.0 to consider whether they wish to adopt any of the recommendations of ILPA 3.0 as standard requests when they are investing in private equity funds.

It remains to be seen whether and to what extent the industry will adopt ILPA's best practice recommendations and what impact the industry's response may have on LPs and GPs, particularly in respect of recommendations that affect fund economics.

What You Need to Know About ILPA 3.0: Key Changes

The Buck Stops Here: Key Economic Terms

While many of ILPA's recommendations are relatively uncontroversial, other recommendations may be more troubling for fund sponsors, specifically those that would affect the economics of a fund:

  • Calculation of Preferred Return. ILPA recommends that to "mitigate investor risks, the carried interest calculation should ideally utilize a 'hard hurdle' whereby the GP's carried interest is based only on the portion of profits that exceed the LPs' preferred return."1 One of the stated rationales for this recommendation is to improve alignment of interests between GPs and LPs; however, this approach would eliminate the "catch-up" provision of the distribution waterfall. A catch-up provision ensures that the GP receives carried interest on all net profits, including those in respect of the preferred return. The effect of this recommendation is that the GP will, in fact, not receive the stated carried interest percentage.
  • Consistent with guidance it issued in 2017, ILPA also recommends that the preferred return be calculated from the date on which the investors' capital is at risk (to address a scenario in which the GP draws on its subscription line in lieu of making a capital call to fund investments).2 This approach may be less troubling from a GP's perspective than the proposal to remove the catch-up, but it has not yet gained traction in the market. However, given the increasing concerns of institutional investors regarding the use of subscription lines, fund sponsors should be prepared to justify the permitted uses of those subscription lines in the fund's partnership agreement or consider adopting the ILPA's 2017 guidance.
  • Clawback. ILPA has reverted to its 2009 position regarding the calculation of clawback obligations: any clawback obligation should be determined gross of taxes paid by carried interest recipients. This approach would have the effect of individual carry recipients being out of pocket for taxes paid on the carried interest, which may not be recoverable following a clawback payment.
  • Fee Offsets. ILPA 3.0 states, "Any portfolio company fees that are charged should be 100% offset against the management fee and subject to standard disclosure."3 ILPA's prior view was simply that fee offsets should accrue to the benefit of the fund. While a 100% fee offset is quite typical, the devil is always in the details. For example, an issue that may arise relates to LPs such as the sponsor who do not pay management fees. Because those LPs do not pay management fees, they would not get the benefit of a fee offset if it is structured as a simple 100% offset. An alternative approach is to notionally allocate a pro rata portion of fee offsets to all LPs, including those that do not pay management fees, to avoid skewing the economics among the LPs as a result of the offset.
  • Partnership Expenses. ILPA 3.0 has increased the focus on the type of expenses that would be appropriate to charge to a fund. For example, an ILPA 3.0 compliant fund would be permitted to charge the costs of a third-party administrator to the fund only if the LPs have approved the use of a third-party administrator. In addition, travel expenses related to sourcing a deal, networking and "preliminary" due diligence should be borne by the fund manager rather than the fund itself. Under ILPA 3.0, travel related to a potential investment may be treated as a transaction cost borne by the fund only after the potential investment advances past the initial term sheet. ILPA also states that expenses for due diligence related to environmental, social and governance (ESG) issues and to management and reporting should be borne by the manager.
  • Cap on Indemnification. ILPA 3.0 recommends that indemnification expenses be "capped as a percentage of total fund size."4 If this approach is adopted by fund sponsors, the GP of the fund could be required to bear the costs of significant claims, such as indemnification claims brought by third parties against the GP following the sale of a business or claims brought against the principals of the fund. Although representation and warranty insurance can mitigate this risk to some extent in the M&A context, representation and warranty insurance policies customarily include significant carve-outs for items such as environmental claims and any claims that are known at the time the agreement is entered into.

Focus on Transparency and Good Governance

In addition to the recommendations relating to economic terms, ILPA 3.0 sets out the following recommendations, each of which appears to be focussed on transparency and good governance:

  • GPs should consider establishing and maintaining an ESG policy with verifiable procedures and protocols.
  • Any and all changes in ownership of the fund manager, however small, should be reported to LPs in advance.
  • All potential conflicts of interest, including those specifically contemplated in a fund's governing agreements, should be cleared by the LP Advisory Committee. ILPA has identified cross-fund investments and GP-led secondary transactions as of particular concern in this regard, and ILPA 3.0 includes detailed recommendations regarding the manner in which GPs should mitigate conflicts in the context of GP-led secondary transactions.
  • Carve-outs to indemnification clauses such as fraud, gross negligence and wilful misconduct should not be qualified by material adverse effect, which ILPA regards as having the effect of inappropriately lessening the fiduciary duty owed to LPs.
  • Fund sponsors should seek to "avoid over-concentration in short time periods";5 we note, however, that ILPA has not recommended including pacing requirements in the partnership agreement. It remains to be seen whether the investor community will embrace the concept of pacing requirements and begin to request them more frequently.

How Will ILPA 3.0 Change Your Life, or Will It?

It would be easy to conclude that ILPA 3.0 will change the landscape of fund term negotiations in a significant way, given the extent of its recommendations. But to borrow a phrase from Back to the Future Part III, "your future hasn't been written yet."6 Market practice varies from ILPA's past recommendations, and it is likely to continue to do so in the future. In our view, the best response to ILPA 3.0 would be reasoned, contextual and market-driven. After all, ILPA itself acknowledges that the principles should not "be applied as a checklist, as each partnership should be considered separately and 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 given time, nor account for every individual circumstance."7

Private equity fund sponsors would be well advised to become familiar with ILPA 3.0, which contains a number of additional recommendations not summarized here. Sponsors should come to the negotiating table prepared to discuss why they have proposed certain fund terms that diverge from ILPA 3.0. Investors, meanwhile, should consider ILPA 3.0 in the context of each fund they are evaluating, the parties' relative bargaining powers and their own priorities. ILPA 3.0 has not relieved fund sponsors and their investors of the obligation to pick their battles, but it has given them more things to think about when they do.


1. ILPA 3.0 at 10.

2. "Subscription Lines of Credit and Alignment of Interests: Considerations and Best Practices for Limited and General Partners," online:

3. ILPA 3.0 at 13.

4. ILPA 3.0 at 21.

5. ILPA 3.0 at 22.


7. ILPA 3.0 at 6.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions