Tag: ILPA

ILPA Asks for Regulatory Changes for Private Equity

The Institutional Limited Partners Association and 35 of its member institutions sent a letter to the Securities and Exchange Commission pushing for stronger regulations on private equity advisory firms.  

ILPA is asking the SEC to make 7 changes.

  1. Rescind the Heitman Capital Management No-Action Letter, issued in 2007.
  2. SEC enforcement settlements with private fund advisers should not be conditional on them not seeking indemnification from their investors.
  3. Require private fund advisers to explicitly and clearly disclose the standard of care owed to investors and the fund.
  4. Set that the standard of care owed to clients of private fund advisers under the Advisers Act as a “negligence” standard.
  5. Limit the ability for private fund adviser to “pre-clear” conflicts of interest to ensure informed consent by investors.
  6. Private fund advisers should have a limited partner advisory committee as best practice, and all conflicts should be presented to the LPAC for resolution.
  7. Provide more clarity surrounding hedge clauses, including the limits of their scope and the facts and circumstances in which they can be used.

This most recent letter is a follow-up to letter requests in August 6, 2018 and November 21, 2018 that raised similar concerns.

One focus is the standard of care owed to investors. ILPA’s letter raises concerns about eliminating or significantly modifying fiduciary requirements under Delaware state law. This practice was permitted under the Heitman Capital Management No-Action Letter.

This comes into play under the fund’s indemnification provisions which may require LPs to indemnify the fund manager to a “gross negligence” standard. The Advisers Act standard is a lower simple “negligence” standard. A hedge clauses may effectively raise the Advisers Act fiduciary standard to “gross negligence.” If the SEC brings an enforcement action and settles with the fund manager, LPs may be required to indemnify the fund manager for a fine under the fund’s indemnification provision.

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ILPA Guidance on Subscription Lines of Credit

The Institutional Limited Partners Association (ILPA) released guidance regarding the use of subscription lines of credit facilities by private equity funds. ILPA outlines the risks and potential impact on limited partners.

As with most potential conflicts, ILPA recommends better disclosure and greater clarity for their use.

Subscription lines of credit are a great tool for a fund. It allows a quick draw on capital and gives the fund manager to give limited partners a better plan for when capital will be called.

But according to ILPA, some fund managers are starting to use the lines of credit to hold off calling capital for longer and longer periods of time.

ILPA is also concerned that disparate of use of lines of credit among different fund managers makes it hard to compare returns from one manager to another.

Some of the recommendations that caught my attention:

  1. Use the date the credit facility is drawn for calculating the waterfall instead of the capital call.
  2. Disclosure of the impact of the facility on IRR.
  3. Limit the outstanding balance to less than 25% of uncalled capital.
  4. Limit the borrowing to 180 days outstanding.

It would seem to me that if a fund agrees to the time limit for the outstanding balance, then the other 3 items are reduced. The facility is then much more about allowing the fund manager to have better speed of execution instead of a tool to manipulate returns.

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New ILPA Fee Reporting Template

Investors look for transparency in fees. The Institutional Limited Partners Association published a Fee Reporting Template Last Week to encourage uniformity in the fee disclosures being made to private fund investors.

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The aim of this proposed template is to encourage increased uniformity in the fee disclosures the fund managers provide to limited partners in private funds. ILPA proposes two benefits:

  1. Providing limited partners with an improved baseline of information that lends itself to more streamlined analysis and informed internal decision making
  2. Reducing the compliance burden on fund managers, who face a variety of bespoke template formats

Only two fund managers have signed on as endorsing the template.

Already, the California controller is pitching the SEC to mandate the template as a reporting obligation.

Fees in all investments have disclosure problems. How much are you paying in fees for your mutual funds? I, like many of you, don’t know. Most investors look at overall performance. Low fees are great, but not if it’s for low performance.

Private funds are obviously different form mutual funds. It’s not easy to sell and re-invest the money.

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