It’s been nearly one year since the Institutional Limited Partners Association (ILPA) released a set of “best practices” for structuring private equity funds. This was hardly the first attempt to better align interests between GPs and LPs, but is the one that seems to have prompted the most discussion among market professionals.
In preparation of the anniversary, market research firm Preqin decided to examine whether the principles are having a tangible effect on fund structure. The results were decidedly mixed.
Preqin examined all funds of 2009 and 2010 vintage, including those in market and many that actually launched before the ILPA principles were released last September. Yes, that last part is a major methodological flaw — particularly since its includes around three-quarters of the analyzed funds — but the research still gives a good reflection of where things stand today.
The group found that a majority of global funds meet the ILPA recommendation of using an “all contributions-plus-preferred-return-back-first model,” but that the figure drops to just 48% when looking at North American funds (47% go “deal-by-deal”).
When it comes to fee-sharing, 39% of funds follow the ILPA recommendation that 100% of “transaction, monitoring, directory, advisory and exit fees” accrue to limited partners. But most GPs still take a big slice, including 28% that rebate 80%, and 26% that rebate between 50% and 59 percent.
Ninety-seven percent of funds reduce their management fee after the investment period concludes, while only 4% follow an ILPA recommendation that would allow no-fault divorces by vote of two-thirds of LP interests (58% put the threshhold at 80%).
Finally, Preqin reported that 13% of surveyed LPs “would dismiss an opportunity to invest in a fund based solely on its non-adherence to the Principles.” Interesting stat, but it doesn’t quite jive with only 4% of funds following the no-fault divorce clause (unless that 13% of LPs only invested in those 4% of funds over the past two years).
It’s too bad that Preqin didn’t compare these figures to fund structures from earlier vintages, but my sense is that any pro-LP changes have been driven more by macro-fundraising issues than by ILPA activism.
To me, the ILPA principles are really two things:
(1) An excuse. As in: “We’re not investing in your fund because you don’t follow the ILPA principles.” Now the LP probably wouldn’t have invested anyway, but this is much easier to say than: “We don’t like you very much.”
(2) A tool for LPs to use when negotiating. As in: “You might think this proposed term is crazy, but it’s been ratified by ILPA.” This also works for GPs, when trying to show good faith.
View the Preqin data below, or download it here.