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Transcript of ILPA-Private-Equity-Principles-2 0_011111
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Institutional Limited Partners Association
Private Equity Principles
VERSION 2.0l
JANUARY 2011
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Contents
ILPA Private Equity Principles 2
Alignment o Interest 4 Carry/Waterall
Management Fee and Expenses
Term o Fund
General Partner Fee Income Ofsets
General Partner Commitment
Standard or Multiple Product Firms
Governance 7 Team
Investment Strategy
Fiduciary Duty
Changes to the Fund
Responsibilities o the LPAC
Transparency 11Management and Other Fees
Capital Calls and Distribution Notices
Disclosure Related to the General Partner
Risk Management
Financial Inormation
LP Inormation
Appendix A 13
Limited Partner Advisory Committee
Appendix B 16 Carry Clawback Best Practice Considerations
Appendix C 18Financial Reporting
About the ILPA 20
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ILPA Private Equity Principles
ILPA Private Equity Principles
he Institutional Limited Partners Association(ILPA) released the Private Equity Principles(the Principles) in September 2009 to encourage
discussion between Limited Partners (LPs) and
General Partners (GPs) regarding und partnerships.
Tese Principles were developed with the goal o
improving the private equity industry or the long-term
benet o all its participants by outlining a number okey principles to urther partnership between LPs and
GPs. Over the past year, ILPA has heard numerous
success stories regarding improved communication
between LPs and GPs. o that end, the Principles
are o to a great start in achieving the goals that
were originally envisioned.
In order to make ongoing improvements to the
Principles, ILPA committed to solicit additional eedbackrom both the LP and GP communities throughout
2010. Ater reecting on the extensive input rom these
discussions, the ILPA Best Practices Committee drated
a new version o the Principles. Tis release retains the
key tenets o the rst Principles release while increasing
their ocus, clarity and practicality.
We continue to believe three guiding principles orm the
essence o an eective private equity partnership:
1. Alignment o Interest
2. Governance
3. ransparency
Te three guiding principles are elaborated upon urther
in the ollowing sections to introduce the revised
preerred private equity terms and best practices or
Limited Partner Advisory Committees (LPAC).
Tese preerred private equity terms and best practices
may inorm discussions between each GP and its
respective LPs in the development o partnershipagreements and in the management o unds. ILPA
does not seek the commitment o any LP or GP to any
specic terms. Tey should not be applied as a checklist,
as each partnership should be considered separately
and holistically. We recognize that a single set o terms
cannot provide or the broad exibility o market
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ILPA Private Equity Principles
circumstance and thereore we emphasize the importance
o LPs and GPs working in concert to develop the same
set o expectations when entering into any particular
partnership. We believe that careul consideration to each
o these preerred private equity terms and best practices
will result in better investment returns and a more
sustainable private equity industry.
In line with the spirit o the Principles, we encourage
all LPs to be transparent in their consideration and
application o these Principles. A list o organizations
that endorse the ILPA Private Equity Principles is posted
on the ILPA website (ilpa.org).
Te remainder o the document comprises three sections
on Alignment o Interest, Governance, and ransparency
and three appendices on LPAC Best Practices (AppendixA), Carry Clawback Best Practice Considerations
(Appendix B) and Financial Reporting (Appendix C).
Each section starts with a general discussion o the
application o the three guiding principles and
continues with detail on specic aspects or points
o emphasis. Te detail should always be seen as
subordinate to the more general principles. Te
appendices are oered as deeper dives into specic
topics o broad relevance or great complexity. Te
appendix on LPAC Best Practices is a completelyredrated version o the original Appendix A,
reecting considerable input rom GPs. Te appendix
on Carry Clawback is new, and given the complexity
o this subject, it was deemed worthy o outlining
suggestions or what we all hope will be a rare
contingency. Appendix C covers GP reporting
best practices. Standardized Reporting emplates
are being developed concurrently. Going orward,
ILPA will consider issuing urther appendices toaddress similar topics as industry best practices continue
to evolve. Suggestions or such consideration should be
submitted to the ILPA.
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ILPA Private Equity Principles
Alignment o interest between LPs and GPs isbest achieved when GPs wealth creation isprimarily derived rom carried interest and returns
generated rom a substantial equity commitment to
the und, and when GPs receive a percentage o prots
ater LP return requirements are met.
GP wealth creation rom excessive management,
transaction or other ees and income sources, reducesalignment o interest. We continue to believe that a
GPs own capital at risk serves as the greatest incentive
or alignment o interests. GP equity interests in unds
primarily made through cash contributions result in
higher alignment o interest with LPs compared to those
made through the waiver o management ees.
We continue to believe that an all-contributions-plus-
preerred-return-back-rst waterall is best practice. In
situations where a deal-by-deal waterall is used, theaccompanying use o signicant carry escrow accounts
and/or eective clawback mechanisms will help ensure
LPs are ully repaid in a timely manner when the GP has
received carry it has not earned.
We recognize alignment o interests can be achieved
through many dierent combinations o the elements
stated above or indeed, through new approaches.
Alignment o interest must be evaluated in giving
consideration to each o these elements in totality.
CARRY/WAERFALL
Waterfall Structure
l A standard all-contributions-plus-preerred-
return-back-rst model must be recognized
as a best practice
l Enhance the deal-by-deal model:
Return o all realized cost or given
investment with continuous makeup o
partial impairments and write-os, and
return o all ees and expenses to date
(as opposed to pro rata or the exited deal)
For purposes o waterall, all unrealized
investments must be valued at lower o cost
or air market value
Require carry escrow accounts with signicant
reserves (30% o carry distributions or more)
and require additional reserves to cover
potential clawback liabilities
l Te preerred return should be calculated
rom the day capital is contributed to the
point o distribution
Alignment o Interest
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ILPA Private Equity Principles
Calculation of Carried Interest
l Alignment is improved when carried interest
is calculated on the basis o net prots (not gross
prots) and on an ater-tax basis (i.e. oreign or
other taxes imposed on the und are not treated as
distributions to the partners)
l No carry should be taken on current income or
recapitalizations until the ull amount o invested
capital is realized on the investment
Clawback
l Clawbacks should be created so that when they
are required they are ully and timely repaid
l Te clawback period must extend beyond the
term o the und, including liquidation and
any provision or LP giveback o distributions
l Appendix B serves as a model given this is an
area o considerable complexity
MANAGEMEN FEE AND EXPENSES
Management Fee Structure
l Management ees should be based on reasonable
operating expenses and reasonable salaries, as
excessive ees create misalignment o interests
l During the ormation o a new und, the GP
should provide prospective LPs with a ee
model to be used as a guide to analyze and
set management ees
l Management ees should take into account the
lower levels o expenses generally incident to the
ormation o a ollow-on und, at the end o the
investment period, or i a unds term is extended
Expenses
l Te management ee should encompass all normal
operations o a GP to include, at a minimum,
overhead, sta compensation, travel, deal sourcing
and other general administrative items as well as
interactions with LPs
l Te economic arrangement o the GP and its
placement agents should be ully disclosed as
part o the due diligence materials provided to
prospective limited partners. Placement agent ees
are oten required by law to be an expense borne
entirely by the GP
ERM OF FUND
l Fund extensions should be permitted in 1 year
increments only and be approved by a majority
o the LPAC or LPs
l Absent LP consent, the GP must ully liquidate
the und within a one year period ollowing
expiration o the und term
GENERAL PARNER FEE INCOME OFFSES
l ransaction, monitoring, directory, advisory,
exit ees, and other consideration charged by
the GP should accrue to the benet o the und
A L I G N M E N T O F I N T E R E S T
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ILPA Private Equity Principles
GENERAL PARNER COMMIMEN
l Te GP should have a substantial equity interest
in the und, and it should be contributed in cash
as opposed to being contributed through the
waiver o management ees
l GPs should be restricted rom transerring their
real or economic interest in the GP in order to
ensure continuing alignment with the LPs
l Te GP should not be allowed to co-invest in
select underlying deals but rather its whole equity
interest shall be via a pooled und vehicle
SANDARD FOR MULIPLE PRODUC FIRMS
l Key-persons should devote substantially all their
business time to the und, its predecessors and
successors within a dened strategy, and itsparallel vehicles. Te GPs must not close or act
as a general partner or a und with substantially
equivalent investment objectives and policies
until ater the investment period ends, or the und
is invested, expended, committed, or reserved or
investments and expenses
l Te GP should not invest in opportunities
that are appropriate or the und through other
investment vehicles unless such investment is
made on a pro-rata basis under pre-disclosed
co-investment agreements established prior to
the close o the und
l Fees and carried interest generated by the
GP o a und should be directed predominantlyto the proessional sta responsible or the success
o that und
l Any ees generated by an afliate o the GP,
such as an advisory or in-house consultancy,
whether charged to the Fund or an underlying
portolio company, should be reviewed and
approved by a majority o the LPAC
A L I G N M E N T O F I N T E R E S T
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ILPA Private Equity Principles
he vast majority o private equity unds are basedon long-term, illiquid structures where the GPmaintains sole investment discretion. LPs agree to such
structures based on their condence in a dened set o
investment proessionals and an understanding o the
strategy and parameters or the investments.
Given that a Limited Partnership Agreement (LPA)
cannot make advance provision or all circumstancesand outcomes, LPs need to ensure that the appropriate
mechanisms are in place to work through unoreseen
conicts as well as changes to the investment team or
other und parameters. An eective LPAC enables LPs to
ulll their duties dened in the partnership agreement
and to provide advice to the GP as appropriate during
the lie o the partnership. Te role o the LPAC is
discussed urther in Appendix A.
EAM
Te investment team is a critical consideration in making
a commitment to a und. Accordingly, any signicant
change in that team should allow LPs to reconsider and
reafrm positively their decision to commit, through the
operation o the key-man provisions:
lAutomatic suspension o investment period,
which will become permanent unless a dened
super-majority o LPs in interest vote to re-instate
within 180 days, when a key-man event istriggered or or cause (e.g. raud, material breach
o duciary duties, material breach o agreement,
bad aith, gross negligence, etc.)
l Situations impacting a principals ability to meet
the specied time and attention standard should
be disclosed to all LPs and discussed with, at a
minimum, the LPAC
l LPs should be notied o any changes to
personnel and immediately notied when
key-man provisions are tripped
l Changes to key-man provisions should be
approved by a majority o the LPAC or LPs
INVESMEN SRAEGY
Te stated investment strategy is an important
dimension that LPs rely on when making a decision
to commit to a und. Most LPs commit to PE unds
within the context o a broad portolio o investments
alternative and otherwise and select each und or
the specic strategy and value proposition it presents.
Te unds strategy must thereore be well dened and
consistent:
lTe investment purpose clause should clearly
and narrowly outline the investment strategy
lAny authority to invest in debt instruments,
publicly traded securities, and pooled investment
vehicles should be explicitly included in the agreed
strategy or the und
l Funds should have appropriate limitations on
investment and industry concentration and
may consider investment pace limitations,
i appropriate
l Te GP should accommodate a LPs exclusions policy,
which may proscribe the use o its capital in certain
sectors and/or jurisdictions. However, consideration
o increased concentration eects on remaining
LPs and transparency o process and policies must
be requisite in the event o a non-ratable allocation
Governance
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ILPA Private Equity Principles
FIDUCIARY DUY
Given the GPs high level o discretion regarding
operation o the partnership, any provisions that allow
the GP to reduce or escape its duciary duties in any way
must be avoided:
l GPs should present all conicts to the LPAC or
review and seek prior approval or any conicts
and/or non arms length interactions or
transactions. As materiality is a subjective
criterion, it is best to consult the LPAC in all
instances. No GP should clear its own conicts
l Te high standard o duciary duty applicable to
the GP should preclude provisions that allow or
them to be exculpated in advance or indemnied
or conduct constituting a material breach o the
partnership agreement, breach o duciary duties,
or other or cause events
l A majority o LPs must be able to remove the
GP or terminate the und or cause
l Conditions precedent and other removal
mechanisms should be constructed so that LPs
can act beore there is irreparable damage to their
interests. o the extent that there are mitigating
actors, LPs will take these into consideration in
evaluating their response to the or cause event
l o the extent that an all-partner clawback is
appropriate in order or the und to indemniy the
GP, this should be limited to a reasonable
proportion o the committed capital but in no
case more than 25% and limited to a reasonable
period, such as two years ollowing the date o
distribution
o assist in monitoring the GP in the perormance o
its duciary and other duties to the und, LPs rely upon
independent auditors and may need, in certain instances,
other support rom third parties. Independent auditors
are engaged on behal o the und and should alert theLPAC to any known conicts o interest in relation to
perorming such duties.
l Te auditor should present their view on valuations
and other relevant matters annually to the LPAC
and be available to answer questions at the annual
meeting o the und. A list o the members o the
LPAC should be provided to the auditors
l
LPs should be notied o any change in theindependent external auditor o the und
l Te auditors should review the capital accounts
with specic attention to management ee,
other partnership expenses, and carried interest
calculations to provide independent verication o
distributions to the GP and LP
l When considering important matters o und
governance or other matters where the GPs
interests may not be entirely aligned with the
LPs, a reasonable minority o the LPAC may
engage independent counsel at the unds expense
G O V E R N A N C E
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ILPA Private Equity Principles
CHANGES O HE FUND
Given the long-term nature o the PE partnership,
the unds terms and governance must be well dened
upront but also be exible enough to adapt to changing
circumstances. With appropriate protections or the
interests o the GP, LPs should have the option to
suspend or terminate the und.
l Any amendment to the LPA should require the
approval o a majority in interest o the LPs, and
certain amendments should require a super-majority
approval. Amendments that negatively aect the
economics o a particular LP should require that
LPs consent
l No ault rights upon two-thirds in interest vote o
LPs or the ollowing:
Suspension o commitment period
ermination o commitment period
l No ault rights upon three-quarters in interest
vote o LPs or the ollowing:
Removal o the GP
Dissolution o the Fund
RESPONSIBILIIES OF HE LPAC
Te role o the LPAC has been evolving in recent
years in response to (i) the requirement or increased
transparency into the operations o the GP and the und
(driven by increasing emphasis on LPs duciary duties);
(ii) the increasing complexity brought by multi-product
rms; and (iii) most recently, the strains o the nancial
crisis. Te LPAC has no broad governance role in a PE
limited partnership. Its ormal responsibilities are dened
by the LPA and are generally limited to reviewing and
approving:
l ransactions that pose conicts o interest,
such as cross-und investments and relatedparty transactions
l Te methodology used or portolio company
valuations (and in some cases, approving the
valuations themselves)
l Certain other consents or approvals pre-dened
in the LPA
Te LPAC should engage with the GP on discussions opartnership operations, including but not limited to:
l Auditors
l Compliance (including CSR/ESG/PRI)
l Allocation o partnership expenses
l Conicts
l eam developments
l New business initiatives o the rm
G O V E R N A N C E
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ILPA Private Equity Principles
However, as indicated, the LPAC is not intended to serve
as a representative or proxy or the broader base o LPs
and should not replace requent, open communications
between the GP and all LPs.
Additionally, an eective LPAC depends on a high
degree o trust and commitment among the various
parties. LPs serving on the LPAC and receiving sensitive
inormation must keep such inormation condential.LPAC members should support the GP in taking
appropriate sanctions against any LP that breaches this
condentiality.
LPs that accept a seat on the LPAC should commit
the necessary time and attention to the und. LPAC
members should participate in all LPAC meetings, be
G O V E R N A N C E
properly prepared, and responsibly ulll the duties o
their role. LPAC members should be able to take into
account their own interest in voting on the LPAC and
should be appropriately indemnied.
Additionally, GPs should disclose the identity o
certain LPs which they believe may have conicts
o interest with other LPs in a und. Te GP is in a
position to determine i LP-LP conicts may arise inselected situations, including but not limited to, (i) LPs
participating in an investment related to the und, such
as a separate managed account which invests alongside
the und or a co-investment in one o the unds
portolio companies, (ii) i an LP has an ownership
in the GP or one o its afliates, or vice-versa or
(iii) i a LP has received preerential economic terms.
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ILPA Private Equity Principles
GPs should provide detailed nancial, riskmanagement, operational, portolio, andtransactional inormation regarding und investments.
Tis enables LPs to eectively ulll their duciary
duties as well as to act on proposed amendments or
consents. LPs acknowledge the important responsibility
they bear with higher transparency in the orm o
condentiality.
MANAGEMEN AND OHER FEES
l All ees (i.e., transaction, nancing, monitoring,
management, redemption, etc.) generated by
the GP should be periodically and individually
disclosed and classied in each audited nancial
report and with each capital call and distribution
notice
l All ees charged to the und or any portolio
company by an afliate o the GP should also
be disclosed and classied in each audited
nancial report
CAPIAL CALLS AND
DISRIBUION NOICES
l Capital calls and distributions should provide
inormation consistent with the ILPA Standardized
Reporting Format
l Te GP should also provide estimates o quarterly
projections on capital calls and distributions
DISCLOSURE RELAED O
HE GENERAL PARNER
Te ollowing should be immediately disclosed to LPs
upon occurrence:
l Any inquiries by legal or regulatory bodies
in any jurisdiction
l Any material contingency or liability arising
during the unds lie
l Any breach o a provision o the LPA or other
und documents
Other activities related to changes in the actual or
benecial economic ownership, voting control o the
GP, or changes or transers to legal entities who are a
party to any related document o the und should be
disclosed in writing to LPs. Such activities include but
are not limited to:
l Formation o public listed vehicles
l Sale o ownership in the management company
to other parties
l Public oering o shares in the management
l Formation o other investment vehicles
ransparency
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ILPA Private Equity Principles
RISK MANAGEMEN
GP annual reports should include portolio
company and und inormation on material risks and
how they are managed. Tese should include:
l Concentration risk at und level
l Foreign exchange risk at und level
l Leverage risk at und and portolio company levels
l Realization risk (i.e. change in exit environment)
at und and portolio company levels
l Strategy risk (i.e. change in, or divergence rom,
investment strategy) at portolio company level
l Reputation risk at portolio company level
l Extra-nancial risks, including environmental,
social and corporate governance risks, at und
and portolio company level
l More immediate reporting may be required
or material events
FINANCIAL INFORMAION
lAnnual Reports - Funds should provide
inormation consistent with the ILPA
Standardized Reporting1or Portolio Companies
and Fund inormation at the end o each year
(within 90 days o year-end) to investors
l Quarterly Reports - Funds should provide
inormation consistent with the ILPA
Standardized Reporting or portolio companies
and und inormation at the end o each
quarter (within 45 days o the end o the quarter)
to investors
LP INFORMAION
l A list o LPs, including contact inormation,
excluding those LPs that specically request to be
excluded rom the list
l Closing documents or the und, including the
nal version o the partnership agreement and
side letters
l LPs receiving sensitive inormation as described
above must keep such inormation condential.
Agreements should clearly state that LPs
may discuss the und and its activities amongst
themselves. LPs should support the generalpartner in taking appropriate sanctions against
any LP that breaches this condentiality
T R A N S P A R E N C Y
1 Appendix C outlines current reporting best practices, however, as standardized reporting templates
(available on ilpa.org) continue to evolve, they are intended to encompass all reporting best practices
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ILPA Private Equity Principles
Tese best practices are oered to provide a model or
LPAC duties, its role in the partnership, and meeting
protocol. We recognize the diering constituencies
o individual partnerships and acknowledge that one
standard may not t every situation. We believe that
LPs and GPs should explicitly establish the duties o the
LPAC through the LPA and mutually adopt preerred
meeting protocol upon establishment o the LPAC. Te
role o the LPAC is not to directly govern, nor to audit,but to provide a sounding board or guidance to the GP
and a voice or LPs when appropriate.
Common objectives in relation to every board should
include:
l Facilitating the perormance o the responsibilities
o the advisory board (as dened in the LPA or
by mutual agreement), without undue burden to
the general partner
l Creating an open orum or discussion o matters
o interest and concern to the partnership while
preserving condentiality and trust
l Providing sufcient inormation to LPs so that
they can ulll these responsibilities
We note that the role o the advisory board may
evolve during the term o the und, depending on the
environment, the specic situation o the und, and
other considerations. Te ocus should clearly be on
substance over orm and efciency over ormalistic
mechanisms. o this end, there are two points o
emphasis in this revised protocol:
l Te LPAC should operate as a committee,
not as a collection o individual members; to this
end, GPs should seek to centralize important
discussions within the advisory board context,
and not on a bilateral basis
l Regular provisions or an in camera session should
be made so that LPs can speak, when appropriate,
with a unied voice
LPAC Formation
During the ormation o the LPAC, the GP should
generally adhere to the ollowing protocol:
l Te GP should issue a ormal invitation to those
LPs it has agreed to invite to serve on the LPAC.
Such invitations should provide:
Inormation about the meeting schedule
Expense reimbursement procedures
An outline o the LPACs responsibilities
under the partnership agreement
A statement o indemnication
l Simultaneously with each closing, the GP
should compile a list o LPAC members andtheir contact inormation and circulate this list to
all LPs, providing an updated list i and when any
inormation is changed
Appendix A: Limited Partner Advisory Committee
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ILPA Private Equity Principles
LPAC Meeting Suggested Best Practices
Te GP and LPAC members in each und will determine
the best way to conduct the operations o the LPAC.
Te ollowing best practices are suggested to aid in
developing a joint approach in line with the objectives
outlined above:
Convening a Meeting:
l LPAC meetings should be held in person
at least twice a year with an option to dial-in
telephonically
l Te GP is encouraged to convene the LPAC
more requently to discuss time-sensitive matters
o importance (e.g. conicts); in these cases,
LPAC members should be exible and responsive.
With the consent o the LPAC, certain matters
may be handled by written consent
l Ater initially consulting the GP, a minority o
three or more members using reasonable judgment
and discretion should have the right to call or a
LPAC meeting
l Te LPAC should be made up o a small number
o voting representatives o LPs, with larger unds
having as many as a dozen members, representing
a diversied group o investors
l Upon initial constitution o the LPAC, any
replacements o LPAC members should be
determined by the GP with any additional or
eliminated seats to be approved by mutual consento a majority o the LPAC and general partner
l A standing LPAC meeting agenda should be
developed and a calendar established as ar in
advance as possible. Te meeting agenda and
calendar should be available to all LPs
l Clear voting thresholds and protocols should be
established, including requiring a quorum o
50% o LPAC members when votes are taken
l LPAC members should receive no remuneration,
but the partnership should reimburse their
reasonable expenses in serving on the LPAC
A P P E N D I X A
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ILPA Private Equity Principles
A P P E N D I X A
Agenda:
l Any member o the LPAC may add an
agenda item to the LPAC meeting agenda
subject to a reasonable notice requirement
to the GP
l With any request or consent or approval by
a unds LPAC, the GP will use best eorts tosend each LPAC member background inormation
on the matter at least 10 days in advance o
the meeting
l A portion o each LPAC meeting will be set a
side or an in camera session with only the LPs
present. LPs may elect one or more members o
the LPAC to lead the discussion and report back
to the GP
l Te LPAC should have in camera access to
partnership auditors to discuss valuations.
A representative rom the audit rm should
attend each year-end LPAC meeting or
annual meeting
Voting:
l Any meeting requiring a vote o the LPAC
should be held with only the members othat specic unds LPAC in attendance.
For convenience, LPAC meetings and/or members
o other related unds may be pooled when general
topics are discussed
l Te partnership should indemniy members o
the LPAC
l Each LPAC member should consider whether
they have any potential conicts o interest priorto voting in all circumstances. LPAC members
should disclose actual conicts to other LPAC
members during discussions at LPAC meetings
Records:
l Te GP should take minutes at all LPAC
meetings. LPAC meeting minutes should be
circulated to LPAC members within 30 days and
submitted or approval at the next LPAC meeting.Once approved, LPAC minutes should be
available upon request to all LPs within a
reasonable time period
l Te GP should record all votes taken during
conerence calls or at meetings and maintain a
copy o consents obtained in writing, by acsimile,
or by email. Detailed voting records should
promptly be made available by the GP to any
LPAC member upon request
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While ortunately rare, carry clawback situations
represent one o the greatest challenges to the GP/LP
relationship. Appropriate processes and remedies should
thereore be dened at the start o the und, as alignment
between GP and LP will usually be at a low point when
they occur. Te ollowing building blocks should be
considered with regard to clawbacks:
Seek to Avoid Clawback Situations
l Best approach is all capital back wateralls
(European style) as this will minimize excess
carry distributions
l I deal-by-deal carry, then
NAV coverage test (generally at least 125%) to
ensure sufcient margin o error on valuations
Interim clawbacks should apply, triggered both
at dened intervals and upon specic events
(e.g., key-man, insufcient NAV coverage)
Ensure GPs Backstop Temselves
ILPA strongly recommends joint and several liability o
individual GP members as a best practice as LPs contract
with the GP as a whole rather than individual members.
In cases where joint and several liability is not provided,
a potential substitution would be a creditworthy
guarantee o the entire clawback repayment by any o:
l a substantial parent company; OR
l an individual GP member; OR
l a subset o GP members
However, in general, repayment obligations should
directly track the carry distributions. An escrow account
(generally o at least 30%) may also provide an eective
mechanism or clawback guarantee.
LPs should have robust enorcement powers, including
direct ability to enorce the clawback against individual
GPs. Actual and potential GP clawback liabilities should
be disclosed to all LPs annually along with a plan to
address as additional disclosure in the audited nancial
statements.
Appendix B: Carry Clawback Best PracticeConsiderations
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ILPA Private Equity Principles
Ensure Fair reatment of ax Burden
GPs receive tax distributions rom the und in order
to pay their tax liabilities on carry (capital gains tax
treatment). o the extent that the GP either does not
receive (or must return) carry, there is a loss o the tax
paid since there are limitations on the GPs ability to
carry back losses to oset the gains on which tax was
previously paid. Historically, LPs have absorbed this loss
on behal o GPs. Te initial release o Principles stated
that all carry clawbacks should be gross o tax, but ater
extensive discussions with GPs, we believe that it would
be impractical to ask them to bear the cost.
However, current practice in some cases does not take
into account the GPs ability to reduce the tax burden
through carrying losses orward, osetting a gain
against a loss, or living in a avorable tax jurisdiction.
GPs clearly should not make a prot rom the LPs
willingness to bear their tax payments in clawback
situations. Accordingly, instead o assuming the highest
hypothetical marginal tax rate in a designated location,
the rate should be based on the actual tax situation o the
individual GP member and should take into account:
l Loss carryorwards and carrybacks
l Te character o the und income and deductions
attributable to state tax payments
l Any ordinary deduction or loss as a result
o any clawback contribution or related capital
account shit
l Any change in taxation between the date o the
LPA and the clawback
Any tax advances made to the GP should be returned
immediately i in excess o the actual tax liability.
Fix the Clawback Formula
In essence, the clawback amount should be the lesser o
excess carry or total carry paid, net o actually paid taxes.
However, there are oten errors in the stipulated ormulas
which have a material impact on und cash ows:
l Te tax amount should not simply be subtracted
rom the amount owed under the clawback
l Te clawback ormula should take the preerred
return into account
A P P E N D I X B
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ILPA Private Equity Principles
lAnnual Reports - Funds should provide the
ollowing inormation at the end o each year
(within 90 days o year-end) to investors:
Audited nancial statements (including a clean
opinion letter rom auditors and a statement rom
the auditor detailing other work perormed or
the und);
Internal Rate o Return (IRR) calculations
prepared by the und manager (that clearly
set orth the methodology or determining
the IRR);
Schedule o aggregate carried interest received;
Breakdown o ees received by the manager
as management ees, rom portolio companies
or otherwise;
Breakdown o partnership expenses;
Certication by an auditor that allocations,
distributions and ees were eected consistent
with the governing documentation o the und;
Summary o all capital calls and distribution notices;
Schedule o und-level leverage, includingcommitments and outstanding balances on
subscription nancing lines or any other
credit acilities o the und;
Management letter describing the activities o
the und directed to the LPAC but distributed
to all investors;
Political contributions made by placement agents,
the manager or any associated individuals to trustees
or elected ofcials on investor boards.
lQuarterly Reports - Funds should providethe ollowing inormation at the end o each
quarter (within 45 days o the end o the quarter)
to investors:
Unaudited quarterly prot and loss statements
also showing year-to-date results;
Schedule showing changes rom the prior quarter;
Schedule o und-level leverage, includingcommitments and outstanding balances on
subscription nancing lines or any other credit
acilities o the und;
Inormation on material changes in investments
and expenses;
Management comments about changes during
the quarter;
I valuations have changed quarter-to-quarter,
an explanation o such changes;
A schedule o expenses o the general partner
Appendix C: Financial Reporting
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lPortfolio Company Reports - A und should
provide quarterly a report on each portolio
company with the ollowing inormation:
Amount initially invested in the portolio company
(including loans and guarantees);
Any amounts invested in the portolio company
in ollow-on transactions;
A discussion by the und manager o recent key
events in respect o the portolio company;
Selected nancial inormation (quarterly and
annually) regarding the portolio company
including:
Valuation (along with a discussion o the
methodology o valuation;
Revenue (Debt terms and maturity);
EBIDA;
Prot and loss;
Cash position;
Cash burn rate;
lCapital Call and Distribution Notices
A standardized reporting template has been developed
by ILPA and is available at ilpa.org
Under development standardized reporting
templates to cover annual and quarterly reporting
as well as supporting nancial schedules
A P P E N D I X C
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About the ILPA
he Institutional Limited Partners Association (ILPA) is a member-led not-or-protassociation committed to serving limited partner investors in the global private equity
industry. ILPAs mission is to provide a orum or acilitating value-added communication,
enhancing education in the asset class and promoting research and standards in the private
equity industry.
ILPA has grown substantially since its inception in the early 1990s to include more
than 240 member organizations rom around the globe. While membership is comprised
exclusively o limited partners, the variety o member institutions makes the ILPA a
dynamic organization representing a diverse range o interests.
Te ILPA membership is united by a common goal: to enhance the proessional interests o
its afliates, and ultimately, to enable them to achieve strong portolio perormance. ILPA
member organizations collectively manage approximately $1 trillion o private equity assets.
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For more information on the ILPA
visit ilpa.org or call (416) 941-9393