This summer ILPA released ILPA 3.0, a new version of its principles that update the previous iteration released in 2011. In a webinar broadcast hosted by Real Deals and IQ-EQ  a panel of GPs, LPs and key advisers discussed what the updated principles mean for private equity and what they reveal about how the industry has evolved. 

The Guests:

Jennifer Choi, Managing Director, Industry Affairs at ILPA

Hugh Oliver Stacey, Executive Director – Investor Solutions at IQ-EQ

Gaurav Marwah, Technical Director at IQ-EQ

Geoffrey Geiger, Head of Private Equity Funds & Co-Investments at USS

Gus Black, Partner at Dechert LLP

Neil MacDougall, Chairman at Silverfleet Capital

In the summer of 2014 Andrew Bowden, then still with the SEC, gave his now famous “Spreading the sunshine in private equity speech”, which was soon followed by an unprecedented examination of the industry by investors and regulators. It seemed to mark a turning point of transparency. Five years on a debate between GPs and LPs remains as lively as ever, with discussion around everything from transparency and reporting to terms around fund economics, fees and carry. This is a crucial debate shaping in the future of the private equity industry, and the release of the the ILPA 3.0 Principles earlier this year has been a key part of the discussion.

To help understand this broad and complex subject, Real Deals sat down with a panel of experts working across all sides of the LP-GP ecosystem to understand how ILPA 3.0 has moved the debate on and what is tells us about where the asset class is headed. Here are some of the conversation highlights

ILPA 3.0: what it means of private equity

The first version of the ILPA Principles was published in 2009 and represented one of the first efforts by LPs to articulate a set of concepts and best practices structured around enhanced transparency, alignment of interest and improved fund governance.

ILPA’s managing director of industry affairs Jennifer Choi said the 3.0 version continued to focus on these same cornerstones of the LP-GP relationship, but took into account how the industry has evolved and become a regulated asset class in the US and Europe.

“There are enhanced expectations from investors around transparency. We wanted to make sure we addressed that it in all its forms within this latest edition,” Choi said. “There is a lot more focus between GPs and LPs on how to work together to enhance the industry for everyone.”

Silverfleet chairman Neil MacDougall recalled how, when working as an LP earlier in his career, it would not be uncommon for GPs to shift strategy or amend fund lives and structures with minimal consultation with LPs. “The industry has moved on considerably since then, so it is important to put this in perspective. There is now broad agreement between investors and managers on 95 per cent of the issues. The gap is nowhere near as big as it used to be. The relationship is pretty good and money would not come into the industry if they were uncomfortable with what they were putting their money into”

A starting point

Geoffrey Geiger, the head of private equity funds & co-Investments at USS, said guidelines from ILPA and organisations like InvestEurope had provided a baseline from which negotiations between LPs and GPs could commence. Geiger said a “comply or explain approach” with respect to the guidelines provided the necessary flexibility, but added that it would be difficult to deal with GPs who didn’t buy into the high level principles of industry guidelines.

The real test of relationships, however, was how parties reacted when things weren’t going well.

“It is easy to be aligned when things are going well, but as we know our industry goes up and down in popularity, and we need to be able to stay aligned when things aren’t working out as planned.”

Shifts in reporting

Hugh Oliver Stacey, executive director – investor solutions, at IQ-EQ, said that as industry guidelines had been updated to reflect the growth and maturity of the asset class, investor reporting and IR requirements had evolved too.

“The content, depth and frequency of reporting have increased. Standardisation is now coming in, and has been encouraged across the industry. So there has been a big shift, and I can only see that continuing,” Stacey said.

Terms transformation?

With respect to crucial terms around governance and fund economics, Gus Black, a partner at Dechert, noted that the buoyant fundraising market and strong private equity performance meant that there had been little change to headline terms and economics. One change that had come into the market, however, is that LPs will have discussions about fees when reupping to successor funds managed by GPs that have built sufficient scale and income to cover operating costs.

Guarav Marwah, technical director at IQ-EQ, added that fees and expenses had received greater attention from industry bodies and regulators, with new and updated guidelines providing more detailed analysis on these points.

“Updated guidelines are not just covering best practice on funds and expenses. There have been stronger and more specific recommendations around some of the calculation methodologies around fees and carry computations,” Marwah said. “The broader principles around fund economics are a great initiative and establish a clear benchmark, although there are some recommendations on fund economics that we haven’t seen trickle down to LPAs yet.”

Choi said that feedback from ILPA members suggested that negotiations had focused less on economics and more on governance.

“There is a real focus from LPs on governance and fiduciary duty. It is less about battling on fees and economics per se, and more about LPs securing the requisite transparency they seek from all GPs. For the LP it is about transparency so you know what you are buying and what it costs you,” Choi said.

A full recording of the ILPA 3.0 webinar is available to listen on realdeals.eu.com