On October 30, the Institutional Limited Partners Association (ILPA), an organization with more than 525 member institutions representing over $2 trillion USD of private equity assets under management, released a Model Limited Partnership Agreement (Model LPA) with the objective of further aligning the interest of general partners (GPs) and limited partners (LPs) in the private equity industry and lowering the costs and complexities inherent in conducting LPA negotiations in the current market by providing a familiar starting point for both GPs and LPs in their negotiations in private equity funds.
What is the Model LPA?
ILPA's Model LPA is a comprehensive, Delaware-law based LPA with a "whole of fund" or "return of all capital" waterfall, which is meant to conform to ILPA's recently released ILPA Principles 3.0. In addition, the Model LPA contains an optional escrow provision, a GP clawback provision, which avoids overpayment of carry to the GP, and an LP clawback provision, which requires LPs to recontribute certain distributed amounts to satisfy a financial obligation of the partnership such as a claim against the partnership.
The Model LPA also provides the LP Advisory Committee (LPAC) with useful tools to strengthen the LPAC's ability to participate in the governance of the Fund. Examples of the LPAC's rights under the Model LPA include the ability to meet without the GP being present, the ability to consult with advisers at the Fund's expense and the right to approve all affiliate transactions, even those at "arm's length" to guarantee informed consent. The Model LPA seeks to enhance and emphasize transparency and disclosure to the LPAC and to the LPs.
The Model LPA contains a robust remedies package designed to protect the interests of LPs which includes a "no-fault" removal provision (without the requirement of payment of additional management fees and the option of imposing a haircut on the carried interest) and a "cause" removal provision (with a 100% reduction to the carried interest), the ability of the LPs to terminate the investment period on a "no-fault" basis by vote of 75% in interest, an automatic suspension of the investment period of the Fund upon a Key-Person Event and automatic termination of the investment period if the LPs do not approve a remediation plan for such Key Person Event. The Model LPA also includes provisions that allow for both a "no-fault" and "cause" termination of the Fund (with 75% and 50% in interest of LPs, respectively).
In addition, the Model LPA reflects a standard of care that should be owed by a GP to its LPs, recognizing the fiduciary relationship between the parties. Towards that end, it reflects a material breach of the LPA as grounds for a GP removal as well as grounds for liability for a GP without the ability to seek indemnification.
In addition to using the Model LPA as a benchmarking tool in evaluating their existing and future LPAs, LPs may employ the Model LPA as an educational tool and incorporate it into their internal training programs to educate their teams on LPA terms that ILPA believes to be fair and acceptable to an LP. We note that in several places the Model LPA (as was the case with ILPA Principles 3.0) tries to move current market practice in favor of the LPs.
The Model LPA will also be a useful tool among GPs, who can gain valuable insight on the perspective of the LP community and as a primer on what LPs currently view as representing best practices in the private equity space. ILPA expects the Model LPA to be particularly beneficial to new and emerging fund managers whose objectives are to attract LPs with LPA terms that will not be viewed by LPs as overly GP-friendly and minimize the costs associated with extensive negotiations and the preparation of voluminous side letter agreements to supplement the LPA.
ILPA's Model LPA was produced through the collaboration of ILPA and 20 practicing lawyers with expertise in representing both LPs and GPs in LPA negotiations (including Torys LLP) and represents the culmination of over a year of development. ILPA also sought input from trade associations who provided comments to an early draft of the Model LPA which were later incorporated into the form. It may be used in its entirety in structuring a traditional private equity buyout fund, however individual provisions in the Model LPA can be negotiated and adopted to existing LPAs. ILPA says that it plans to produce a version of the Model LPA containing a "deal-by-deal" waterfall among other planned versions of the Model LPA in the future.
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