Private Equity Contracts Are Expensive And Complex. This Group Wants to Change That.

The Institutional Limited Partners Association released a model limited partnership agreement Wednesday that aims to reduce complexity and costs for both GPs and LPs.

Illustration by II

Illustration by II

In a bid to reduce the complexity and costs involved in agreements between private equity firms and their investors, the Institutional Limited Partners Association has released a new set of guidelines for limited partnership agreements.

The industry association that represents private equity investors, called limited partners or LPs, announced Wednesday that its model limited partnership agreement is now available for general partners (GPs) and LPs to use as a guide for their own contracts.

At present, most GP-LP agreements are bespoke — law firms draw up the contracts, which are then rarely shared between firms, according to Chris Hayes, the senior policy counsel at ILPA.

“It’s hard to get a copy of a draft model LP agreement,” Hayes said. “They’re all secret. It’ll be the first-ever document that’s out there and public.”

ILPA worked with roughly 20 lawyers over about a year to create the model agreement, Hayes said by phone.

The model letter includes provisions for the LP advisory committee to be allowed to meet without the GP or its affiliates present and to approve all affiliate transactions.

It also gives the LPs the right to vote to terminate or suspend the commitment period and to communicate with one another about the fund, the letter shows. It would require GPs to give LPs a list of their fellow LPs on a quarterly basis so that they can know who their peers are and communicate with them about governance.

“We think it’s important for the GP to make sure the LP understands the treatment they should expect,” Hayes said. “They should have a list of the other LPs in the fund. It can help LPs exercise governance rights.”

The model letter includes several provisions to protect both LPs and GPs against overpayment, including an optional escrow provision, a GP clawback (the return of past performance fees to investors if the fund’s investments later underperform), and an LP giveback (when investors have to return money to the fund, for example to pay a claim against the fund), among other provisions.

The letter also specifies how a co-investor with a private equity firm should handle fees, expenses, and liabilities of the portfolio in a way that is fair to other LPs in the fund.

“By putting it out there, it adds value to the private equity industry itself,” Hayes said. “I think this hopefully democratizes access to what a typical limited and fair limited partnership agreement looks like.”

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But not everyone is keen on implementing the new model contract just yet.

“I don’t expect the biggest GPs to just get rid of their contract and use ours,” Hayes said. “Some GP counsel said they didn’t believe in the standardization, but we’re hoping that they’ll take a look at this.”

He added that he hopes the document will be useful especially for emerging managers, as the use of an ILPA-approved model could add credence to their process.