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The California Public Employees’ Retirement System (CalPERS) has strongly endorsed new principles proposed by the Institutional Limited Partners Association (ILPA) to promote stronger alignment of interests between limited and general partners in private equity partnerships, improve investment reporting and transparency, and enhance partnership governance.
“We’ve had strong relationships with our partners since we launched our private equity investment program nearly 20 years ago. These principles will help us build on that foundation,” said George Diehr, Chair of CalPERS Investment Committee. “For the private equity industry as a whole, these guidelines will help ensure that participants stay focused on investment performance as the primary means to profit generation.”
Since launching its ILPA Private Equity Principles on September 8, the global trade association for limited partners has been taking industry comment on behalf of ILPA’s 215 members that collectively manage approximately $1 trillion in private equity assets. The goal is for the Private Equity Principles to serve as a set of guidelines that provide a platform for industry communication with regard to implementing improvements to strengthen the asset class.
The ILPA developed these guidelines after months of collaborations involving a wide range of institutional investors from around the world. Industry participants, including limited partners, general partners, and consultants are encouraged to endorse the Principles. Over time, ILPA will augment the Principles as necessary to reflect changes in the private equity industry.
The key elements of the principles are:
- Alignment of interests: Management fees should cover reasonable operating expenses of the firm and not be excessive; the general partners’ capital commitment to the fund should be substantial, with a higher percentage in cash; and there should be stronger provisions to help avoid profit distribution imbalances between the GPs and LPs.
- Governance: Limited partners, collectively, should have stronger rights to suspend, terminate or dissolve a fund; the fund auditor should be independent; and meetings of Limited Partner Advisory committees should be standardized and adhere to best practices.
- Transparency: General partners should provide greater detail to investors about fees generated, carried interest profits received and underlying portfolio company performance.
“These principles mark the beginning of a new chapter in the private equity industry,” said Joseph Dear, CalPERS Chief Investment Officer. “As our capital commitment to private equity grows, it is important that the nature of our partnerships also evolve to include improved governance rights consistent with the maturing of the asset class.”
The ILPA Private Equity Principles can be found on the association’s Web site at http://www.ilpa.org/.
As of July 31, 2009, CalPERS had $20.6 billion invested in the private equity market through its Alternative Investment Management program and an additional $21.9 billion in unfunded commitments.
