Written by Jonathan McCullough and Elizabeth Dylke
On October 30, 2019, shortly after publishing the latest version of its principles (Principles 3.0), the Institutional Limited Partners Association (ILPA) released the ILPA Model Limited Partnership Agreement (Model LPA), a comprehensive legal template created to reduce the cost and complexity of negotiating the terms of investments in private equity funds. In connection with the release, Steve Nelson, CEO, ILPA noted that “the industry has to date lacked freely accessible model documents that can serve as a baseline for reasonable legal terms and conditions associated with private equity funds.” The Model LPA is designed to meet that purpose and was developed as a part of ILPA’s LPA Simplification Initiative led by a group of both internal and external attorneys, representing both General Partners (GPs) and Limited Partners (LPs) in the global marketplace.
The Model LPA is a Delaware-law based document providing for a “whole of fund” or “European” waterfall which ensures that LPs receive the return of all contributed capital plus a preferred return before carried interest is paid to the GP. ILPA plans to release a second version the Model LPA providing for a “deal-by-deal” waterfall in the future. The Model LPA offers flexibility to adapt economic arrangements and includes:
- a GP catchup and preferred return to ensure that LP and GP positions are aligned with a focus on investment performance;
- an optional escrow provision and GP clawback to ensure LP protection; and
- an LP giveback (subject to certain threshold and time limits) in the event of an indemnification claim against the GP.
General Partner Standard of Care and Indemnification
The Model LPA includes an express term requiring the GP to exercise its duties in good faith and with the care that a prudent person would in a like position and clarifies that such provision supplements, rather than replaces the fiduciary duty of the GP under applicable law. Under the terms of the Model LPA, the GP is indemnified for all claims arising in connection with the management of the Fund so long as such claims do not arise from the GP's fraud, bad faith, willful misconduct, gross negligence, reckless disregard, breach of the LPA or violation of law.
Limited Partner Remedies
The Model LPA terms permit LPs to remove the GP for "cause", which includes a breach of the higher standard of care (voted by a 50 percent of LP interests) or on a no-fault basis (voted by 75 percent of LP interests), and in either case LPs may opt to terminate the Fund at the same time. LPs may also terminate the investment period by notice to the GP brought by LPs representing 75 percent of LP interests. Collectively, these terms offer LPs a wide range of potential remedies in a case of dissatisfaction with Fund management.
Limited Partner Advisory Committee (LPAC) Best Practices
Rights and best practices of the Limited Partner Advisory Committee (LPAC) are evidenced in the Model LPA, and include:
- the ability of any one LP having a representative member on the LPAC to call a meeting of the LPAC;
- the ability of LPAC members to meet in camera without the GP being present;
- the ability to appoint advisors at the expense of the Fund; and
- the requirement of the GP to take minutes of LPAC meetings and report such minutes to all LPs
LPAC approval is also required for all affiliate transactions entered into by the Fund.
The Model LPA provides that each co-investor bear its pro rata share (based on capital committed to a co-investment) of any fees, expenses and liabilities relating to the relevant portfolio investment in order to ensure fairness to all other LPs in the Fund. The GP is required to provide notice to each LP of all co-investments offered and made.
Information and Communication Access for LPs
Under the terms of the Model LPA, LPs are explicitly permitted to communicate with each other regarding Fund-related issues, and the GPs are required to regularly provide the LPs with a list of all other LPs in the Fund to ensure that the partners are familiar with their peers and are able to exercise their governance rights if necessary.
It is unlikely that the Model LPA will have an immediate impact on market terms, but, like the original ILPA Principles, over time we expect it to have a significant impact on the relationship between LPs and GPs. In the short term, the Model LPA will likely be used mainly as a negotiating tool for institutional investors to address specific LPA provisions. Over the longer term, we expect that some of its terms and concepts will migrate into the LPAs for successor funds and it is likely that the Model LPA will be used as a starting point for first-time fund managers seeking institutional support.
A full copy of the Model LPA can be found here.