The ILPA first published the model limited partnership agreement (LPA) for a whole-of-fund waterfall structure in October of last year. The Delaware-law based model LPA focusses on three core principles: fostering transparency, governance and alignment of interests for general partners (GPs) and limited partners (LPs).
With the model LPA now being readily accessible to LPs, managers should be aware that a precedent now exists for LPs to benefit from, in kicking off discussions and negotiations with GPs. It should assist to condense extensive negotiations and lengthy side letters and in turn reduce costs. The publication of the model LPA was accompanied by the ILPA Principles 3.0 (Principles), itemising considerations of practical importance for LPs and GPs.
October 2019 model LPA
The model LPA and the Principles cover several key themes, including the fiduciary duties of GPs and fund managers, management fees, advisory committee best practices and most favoured nation rights.
Fiduciary duties – the Principles recommend reinforcing affirmatively and prominently the standard of care owed by general partners to LPs and the partnership as a whole – this standard of care is seen in the model LPA as the obligation on the GP and the manager to manage and control the business and affairs of the partnership reasonably and in good faith, with the care that an ordinarily prudent person in like position would exercise. This standard of care is stated to apply across all investment decisions, delegations of authority and all other acts and omissions of the GP and the manager, and supplements the already existing statutory fiduciary duties of the GP and manager.
Management fees – the model LPA reflects that a management fee is only payable up till the end of the initial term, thereby excluding any extension of term, or the period of the winding up and liquidation of the partnership – which is often the hardline position an LP would take and a GP would negotiate against. The Principles also recommend a bifurcated fee model where appropriate, to more accurately reflect a blended percentage of capital committed and invested.
Advisory committee best practices – best practices under the Principles are expansive. These include advisory committee involvement in consenting to term extensions, approving the partnership’s auditor and consenting to various types of investments, with emphasis on an active involvement in determining conflicts of interest situations. The Principles advocate for representational diversity across the advisory committee by reference to commitment size, tax status, type and relationship with the GP – a change not commonly seen in practice previously where commitment size typically corresponds with a seat in the advisory committee.
Most favoured nation rights – the model LPA requires the GP to give notice to each LP of the terms of all side letters granting more favourable rights to an LP. It further provides that any other LP would have the right to benefit from such more favourable rights, save in certain circumstances (such as where tax, regulatory or excuse rights are involved). In this respect, the model LPA promotes equalising the playing field across investors, thereby limiting the room to manoeuvre and negotiate more favourable rights for certain special investors.
July 2020 revisions to the model LPA
Recently in July of this year, the ILPA published a revised model LPA along with a term sheet for the whole-of-fund waterfall structure, following feedback received in the market. Some of the changes made to the model LPA include specifying a valuation methodology for valuation of LP interests, providing for an ILPA Capital Call and Distribution Notice Template to standardise capital call notices and distribution notices, and specifying a percentage of 30% carried interest distributions to be deposited into the carried interest escrow account for the account of the applicable partner. The revised model LPA also tightens language around fiduciary duties of the GP and manager, by including express language that the GP and the manager shall not place their or their affiliates' interests ahead of the LPs or the partnership.
Whilst the core principles remain the same as the October 2019 model LPA, these changes made to further fine-tune the October 2019 model LPA demonstrate the ILPA's receptiveness to the market. It is assuring that the model LPA continues to evolve as an up-to-date set of best practices for LPs to take as a reference point and as a base from which GPs can work. The ILPA has also published a deal-by-deal model LPA and term sheet to cater for the commonly American-style deal-by-deal structure.
Concluding remarks
Whilst we welcome the developments made by the ILPA, we recognise that each partnership is different and should be assessed holistically on its merits on a case by case basis. If you would like to explore any of the themes arising in this article in further detail, or if you would like assistance in respect of the fund in which you invest / manage, please contact the authors of this article.
