In September 2009 the Institutional Limited Partners Association (the "ILPA") published a set of private equity principles (the "Principles") which aim to set out "preferred private equity terms" in the context of realigning the interests of the limited partner ("LP") with the general partner ("GP"). The Principles were developed from the input and feedback of institutional private equity investors, senior investment officers and other members of the ILPA and are presented as a set of industry best practices.

The main topics under scrutiny in the ILPA's paper include, levels of management fees, management incentives, the waterfall structure, the GP's equity interest in the fund, key persons and, more generally, transparency and good governance.

This article does not consider all of the Principles, details of which can be obtained from the ILPA's website but rather highlights some of the key areas of interest for GPs and LPs.

The general partner

The Principles focus on a number of areas concerning the conduct and remuneration of the GP, including the following set of Principles:

  • The GP should have a substantial equity interest in the fund in order that it remains properly incentivised and to align its interests with that of the LP. In addition this interest should be in cash rather than through waiver of management fees.
  • All transaction and monitoring fees to accrue to the benefit of the fund, rather than being pocketed by private equity firms, including offsetting management fees and partnership expenses during the life of the fund.
  • Fees and carried interest of the GP should be directed predominantly to the professional staff and expenses related to the success of the fund and the calculation of carried interest should be on an after-tax, net profits basis.

Management fees

When managers hold strong positions in the market then it is not surprising that we see negotiations for and movements towards higher fees for managers. The ILPA seeks to remind the industry that management fees should not be excessive and should cover the reasonable costs of the firm and its principals.

No-divorce clause

This is the clause which dictates how and when investors can terminate their contracts with a fund. The industry recommended threshold is 66% although reports suggest that it is usual to see 75% or higher.

Most limited partnership agreements stipulate that a GP must notify the LP when a key-person event or for-cause event occurs and that this will result in an automatic suspension of the commitment period followed by a vote on whether to remove the suspension or terminate the commitment period.

The ILPA's best practice is to provide for a majority in interest of the LPs to have the ability to elect to bring about an early termination or suspension of the investment period and a supermajority to elect the dissolution of the fund or removal of the GP, without cause.

Terminating the fund is arguably the most extreme remedy for all those involved and the triggers for instigating this remedy, along with the right to remove the GP will always be an important area of negotiation between GPs and LPs.


These control the order in which proceeds from the sale of investments are distributed. The ILPA's best practice is to repay investors in full, plus an additional return (usually around 8%) before performance fees are paid out to the GP. From what we are seeing in Asia, this seems to be generally followed.


Whilst the GP is generally keen to maintain flexibility, the ILPA provides that there are a number of factors which should be incorporated in the ILPA to ensure transparency for the benefit of the LPs. These include the principles that, fee and carried interest calculations should be transparent, fees generated should be periodically disclosed, detailed financial and valuation material to be provided on a quarterly basis and investments should be consistent with the investment strategy.

Limited Partner Advisory Committee

Appendix B of the Principles contains a set of best practices to "improve the effectiveness and efficiency" of the Limited Partner Advisory Committee ("LPAC"). It sets out a protocol for the formation of the LPAC, providing for 7 to 12 (in respect of larger funds) voting representatives of the LPs to make-up the committee as well as for the meeting and duties of the LPAC.

Briefly, the LPAC should not be remunerated for its role but reimbursed for reasonable expenses and given access to independent auditors, advisers and legal counsel at the expense of the partnership or the general partner. LPAC meetings should be held at least twice a year, with any two members having the right to call for an LPAC meeting.

In respect of duties, the LPAC should be given approval rights in respect of transactions posing conflicts of interest and methodology used for portfolio company valuations. More generally the ILPA encourages the LPAC to be given the opportunity to engage with the GP on general partnership operations such as the expenses of the partnership, changes in strategy, new business initiatives and matters concerning the budget.

Although the picture seems to be that GPs are falling short of the ILPA principles, it waits to be seen how influential these Principles will be at the negotiating table. In general though, the Principles are not radical in nature and recognise the need to maintain a balance to ensure that the GP remains properly incentivised, thereby achieving the best results for the fund and thereby for the LPs.

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.