Investors in private equity funds who are negotiating fund terms with fund managers can improve the transparency of the private equity industry and the commercial terms on which they invest by actively advocating for stringent terms and changes in market standards to protect their own interests. Pro-active efforts by investors during negotiations are essential to maintain high standards of investor protection.
Throughout our time acting for both general partners and limited partners, we have witnessed various ebbs and flows in the bargaining power of general partners and limited partners. During the Global Financial Crisis (GFC), a lot of general partners went out of business or underperformed and a lot of investors in private funds had poor returns, which served as a wakeup call for investors in private funds. Before the GFC, fund documents and side letters were much more simple and less protective of investors.
In September 2009, in response to the aftermath of the GFC, the Institutional Limited Partners Association (ILPA) published the ILPA Principles in order to set out industry best practices for the private equity industry (from the perspective of investors). ILPA also subsequently updated the ILPA Principles in 2011 and 2019 (ILPA Principles). From the perspective of investors, the ILPA Principles have helped set the standard for many of the private equity fund terms we see today, including the European waterfall, 100% fee offsets, and GP carry clawback and escrow.
In 2016, ILPA also created the ILPA Reporting Template (2016 ILPA Reporting Template) in order to provide for uniform reporting practices and increased transparency in relation to fees, expenses and carried interest.
However, the pendulum between general partner and investor interests often swings back and forth depending on the macro-economic climate and investor sentiment. Therefore, in spite of ILPA’s best efforts and the advocacy of investors for change, cheap money again led to oversubscribed funds and incidents of wrongdoing by some private equity firms, despite the scrutiny of large institutional investors. For example, in 2018, it was reported that the Abraaj Group, a high-profile private equity firm headquartered in the Middle East which managed money on behalf of institutional investors, including the International Finance Corporation, the Bill and Melinda Gates Foundation and Proparco, had collapsed amidst allegations of fraud, mismanagement and commingling of funds.[1] For many investors, incidents like this were, after the GFC, another tide turning watershed moment, after which investors woke up and started to demand more from the funds in which they invest.
Investors who want to reform the industry cannot rely solely on external government forces to regulate the industry. On 23 August 2023, the U.S. Securities and Exchange Commission (SEC) approved the new Private Fund Advisor (PFA) rules, relying on its statutory authority under the Investment Advisers Act of 1940. Under the revised PFA rules, there were various rules governing quarterly statements, mandatory private fund advisor audits, advisor-led secondaries, restricted activities, advisor misconduct and preferential treatment. Every SEC-registered adviser was required to provide documented annual compliance policy reviews in writing. In addition, the PFA rules also included:
- The Quarterly Statement Rule: Required SEC-registered investment advisers to provide certain disclosures regarding fees, expenses, performance, and adviser compensation in quarterly statements to fund investors;·
- The Mandatory Audit Rule: Required SEC-registered investment advisers to obtain a financial statement audit of each advised private fund; and
- The Preferential Treatment Rule: Required all investment advisers to make certain disclosures of preferential terms offered to prospective and current investors and, subject to certain exemptions, prohibit advisers from providing certain types of preferential treatment that would have a material, negative effect on other investors.
In 2024, in response to the revised PFA rules, ILPA created the Quarterly Reporting Standards Initiative (QRSI), in order to provide updated quarterly reporting standards. The QRSI formed a steering committee, consisting of limited partners, general partners and other stakeholders. The QRSI initiated a ten-week public comment period and held targeted discussions with various limited partners, general partners and other stakeholders in order to come up with a more comprehensive ILPA Reporting Template.
Not long after the revised PFA rules were approved by the SEC in August 2023, a petition was filed in the U.S. Court of Appeals for the Fifth Circuit (Court) seeking to vacate the revised PFA rules on the grounds, inter alia, that the SEC had exceeded its statutory authority in making the rules. General partners opposed the revised PFA rules on the basis of increased costs and administrative burdens. On 5 June 2024, the Court struck down the revised PFA rules – after which the focus of QRSI then shifted from conforming to the revised PFA rules to delivering an updated ILPA Reporting Template based on industry best practice.
On 22 January 2025, ILPA released the updated ILPA Reporting Template. The ILPA Reporting Template is intended to supplement the reporting already provided by general partners in their quarterly reporting, including financial statements required to be provided pursuant to the fund’s limited partnership agreement or other governing documents. The updated ILPA Reporting Template will replace the 2016 ILPA Reporting Template for existing funds which are still in their investment period in the first quarter of 2026 and for new funds established on or after 1 January 2026.
The updated ILPA Reporting Template includes the following key features:
- Internal chargebacks are broken out to identify expenses allocated or paid to the general partner and their related persons;·
- A more detailed breakdown of partnership expenses is required; and
- A single, uniform level of detail for all general partners has been created in order to provide greater consistency with the reporting framework used in governing documents and accounting standards.
The updated ILPA Reporting Template requires general partners to provide more details about offering and syndication costs, placement fees, partner transfers, third-party expenses, subscription facilities fees and interest, insurance fees and the fees that they charge portfolio companies. Under the updated ILPA Reporting Template, feeder funds are now required to report to investors the fees and expenses directly incurred by the feeder fund as well as the allocation of the master fund’s fees and expenses with the same line item description. The updated ILPA Reporting Template also adopted some of the concepts that were in the PFA rules for quarterly reports, including disclosures on fee rebates, waivers, and offsets and more details around expenses allocated or paid to related persons.
On 22 January 2025, the same day on which it released the updated ILPA Reporting Template, ILPA also published a new ILPA Performance Template in order to standardize the return calculation methodologies used by general partners in their quarterly reporting. The ILPA Performance Template is intended to be used by funds established on or after 1 January 2026. The ILPA Performance Template includes the following key features:
- Tables to capture cash flows and fund-level and portfolio-level transactions are mapped by type to provide greater transparency into how the performance metrics are calculated;
- Standardized reporting for performance metrics, including breaking down performance metrics into relevant gross and net figures with and without the impact of subscription facilities; and
- There are two versions of the ILPA Performance Template which can be used by general partners to calculate the fund level performance: one is based on itemized cash flows and the other is based on grossed up cash flows.
The updated ILPA Reporting Template and the new ILPA Performance Template provide an increased level of transparency, which is beneficial for investors, especially for investors with a smaller commitment amount who would typically have less bargaining power in negotiating for reporting rights. Even for larger investors, having standardized reporting templates is beneficial, as it saves them from having to negotiate disclosure terms with each and every general partner. At the same time, as the updated ILPA Reporting Template and new ILPA Performance Template were developed in consultation with general partners and other stakeholders, the QRSI sought to strike a balance between providing investors with information useful to them while not making reporting unduly onerous on general partners, by focusing on items which are material to investors and items which general partners could more easily report on. Therefore, from an investor perspective, it is hoped that this will lead to more general partners being willing to adopt the updated ILPA Reporting Template and the new ILPA Performance Template and therefore create better transparency and standardization in the private funds industry. However, whether and to what extent general partners adopt these templates will also depend on the extent to which investors push for general partners to adopt them during negotiations.
Private Equity International, Adam Le, ‘Behind the headlines: Abraaj falls from grace’, 29 November 2022, <https://www.privateequityinternational.com/abraaj-falls-from-grace/> (accessed at 10 March 2025); Appleby, Sebastian Said and Daniel Coelho, ‘Abraaj Group Fraud – Summary Judgment for Receivers of Secured Lender for Information on the Fraud’, 6 April 2023, https://www.applebyglobal.com/news/abraaj-group-fraud-summary-judgment-for-receivers-of-secured-lender-for-information-on-the-fraud/ (accessed at 10 March 2025).
