ILPA Alignment of Interest Marcel Meyer Partner - Asset Management Zurich PwC
Agenda What do you think about the ILPA Principles? (soft voice) How do you think it will affect my business? (worried voice) They don t matter we go through this every ten years when LPs try to get the upper hand. (with bravado) PEHub.com; Mark di Salvo CEO of Sema4 Inc PricewaterhouseCoopers Slide 2
Best practice / Alignment of interest initiatives 1996 Mercer report: Key terms and conditions for private equity investing Various local and international venture capital association best practice guidelines on valuation, reporting, etc 2005 Private equity industry guidelines group (PEIGG): Reporting and performance measurement guidelines 2006 International private equity and venture capital valuation guidelines 2007-2010 Walker group / guidelines monitoring group (GMG): Reports on disclosure and transparency in private equity (2007, 2009 and 2010) 2009 Institutional limited partners association (ILPA): Private equity principles PricewaterhouseCoopers Slide 3
The ILPA and its guidelines ILPA the organisation Founded in the early 1990s as an informal networking club with 15-20 members Only global organization dedicated to the interests of institutional limited partners Over 230 member organizations spanning all categories of small and large institutions Membership represents well over US $1 trillion in private equity AuM ILPA the guidelines In early 2009 members meet in a series of roundtables to discuss state of the industry In march/may 2009, the ILPA principles committee is founded and a survey is launched to explore its members views on governance, alignment of interest, reporting & transparency 8.9.2009: Publication of the ILPA private equity principles to suggest best practices and intended to serve as a basis for continued discussion among the general partner and limited partner communities with the goal of improving the private equity industry for the long-term benefit of all its participants PricewaterhouseCoopers Slide 4
Content of the guidelines I Alignment of interest Preference for European waterfall calculation If US waterfall is applied, the fund should establish large reserves if a "clawback" obligation arises The GP should make a "substantial" investment in the fund, and that investment should be primarily in cash Any clawback should be calculated on a gross basis (not on an after-tax basis) Management fees should not serve as a profit center, but rather should be based on reasonable operating expenses Fully 100% of any transaction and monitoring fees that are charged by a GP or its affiliates should accrue to the benefit of the fund Key persons should devote substantially all their business time to the fund and its parallel investments PricewaterhouseCoopers Slide 5
Content of the guidelines II Governance Generally, reinforce fiduciary duties of the GP Majority-in-interest of the LPs should be able to require suspension or termination of the investment period without cause (and not the supermajority votes that most fund partnership agreements now require) Two-thirds in interest of the limited partners should be able to remove the general partner or dissolve the fund without cause Key man and for cause provisions result in automatic suspension of investment period, which will be permanent unless two-thirds in interest of the limited partners vote to reinstate within 180 days Indemnification should be capped and limited Independent auditor should not perform other services to GP or affiliates where practicable, change of auditor to be ratified by limited partners Appendix B provides best practice guidance on limited partners advisory committees (meetings excl GP, minutes, duties etc) PricewaterhouseCoopers Slide 6
Content of the guidelines III Transparency All fees generated by the GP to be disclosed and classified periodically Reporting to the LPs should be beefed up to include disclosure of each individual investment professional's share of the carried interest and share of the GP's capital investment in the fund, material changes in personnel, and all fees generated by the GP Other management company activities such as formation of publicly listed vehicles and public offering of shares in management company Details on annual financial information (audited), quarterly reports and portfolio company reports (un-audited) Further provisons on marketing material and LP information such as a list of all limited partners including contact details PricewaterhouseCoopers Slide 7
What do you think about the ILPA principles? Currently, the guidelines are endorsed by more than 100 organisations LP view: Investors have it high on our wish list to see convergence to these principles ; However, very little information as to how they weight compliance vs superior return/track record GP view: Some openly support and endorse the principles, others are persistently fighting them: some provisions (mgt fees, waterfall) seriously challenges the operating model of many (US) GP s collusion of market participants antitrust arguments piercing the GP s veil General consensus: many provisions, particularly around disclosure and transparency, are thoughtful and sensible, others around mgt fees and governance go beyond current market practice PricewaterhouseCoopers Slide 8
How do you think it will affect my business? Recent concessions of GP s in the area of mgt fees terms, clawbacks (Apollo, KKR, Carlyle and TPG) and transactions fees (Blackstone); However, others like Sun Capital Partners have so far (successfully?) denied any concessions Established and successful GP s will be better positioned to resist principles, younger and less successful will be subject to more pressure Generally, pressure on GP s has and will continue to increase, be it on the income side (mgt fees, transaction fee split, carry etc) and the expense side (increased costs of regulation, transparency etc) Democratization of investor base: LP s will want to increase their involvement, review and supervise their GP s PricewaterhouseCoopers Slide 9
They don t matter we go through this every ten years when LPs try to get the upper hand. There is a general recognition that the world has changed, and there are questions around whether the fund terms of the past are still relevant The main impact of the ILPA guidelines has been to frame discussions between LPs and GPs Some signs that principles seem to have an effect, however the depth and correlation of ILPA vs general economic and regulatory pressure remains unclear and to be seen in the future if and when the economy picks up further PricewaterhouseCoopers Slide 10
Questions? PricewaterhouseCoopers Slide 11
2010 PricewaterhouseCoopers CI LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers CI LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. PwC