ILPA publishes 'market standard' limited partnership agreement

The model LPA has been drafted in line with the latest edition of ILPA's Private Equity Principles, and is the first-ever publicly-available model LPA, according to ILPA. It has been designed to reduce the complexity, costs and resources associated with negotiating the terms of investment in private equity funds, and drafted with the interests of both general partners (GPs) and limited partners (LPs) in mind.

ILPA chief executive Steve Nelson said: "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. Consequently, the hundreds of LPAs developed each year are the product of bespoke efforts and one-off negotiations that come with excessive cost to both GPs and LPs".

ILPA primarily represents the interests of the institutional investors who act as LPs of private equity funds including public and corporate pension funds, insurers, hedge funds and others. Over 500 institutions, representing over $2 trillion worth of private equity assets under management, are ILPA members.

Investment funds expert Oliver Crowley of Pinsent Masons, the law firm behind Out-Law, said: "A model LPA based on ILPA principles is a welcome step forward in establishing a benchmark that might be used as a 'market' standard".

"Whilst the ILPA terms are unlikely to be adopted by established GPs certainly in the medium term, the standard form will be useful for certain GPs wishing to present an investor-friendly set of terms," he said.

The model LPA was developed by an expert group of in-house and private practice lawyers representing both GPs and LPs. It is based on the law of the US state of Delaware, and can be used in its entirety to structure investments into a traditional private equity buyout fund. Parties can also choose to insert sections of the document into existing LPAs.

The document has been drafted using legal language deemed as fair and reasonable by the LP community, and will therefore be particularly helpful to newer fund managers who wish to follow best practice and attract LP capital while minimising the associated legal cost, ILPA said. For GPs, the model LPA will allow them to minimise the number and scope of 'side letter' agreements with their LPs.

The model LPA recognises the fiduciary duty of care of the GP and the manager towards the limited partnership, while protecting the GP in certain circumstances. The document also contains model terms covering co-investment, governance, conflicts of interest and key person and removal provisions.

Whilst ILPA's Private Equity Principles state that profits should be distributed on a whole of fund, rather than deal by deal basis, ILPA intends to produce additional model LPAs in the future, including one based on a 'deal-by-deal' waterfall.