LPs make their move at ILPA meeting

Lending further proof that the private equity industry has changed dramatically from its position three years ago, investors are meeting today with several chief buyout shop representatives in what can only be deemed as a rather unusual event and an indication of things to come.

In September last year, the Institutional Limited Partners Association (ILPA) issued guidelines that urged better terms for investors including greater disclosure, minutes at advisory committee meetings and reduced transaction fees. The list of demands was a sign that the balance of power had shifted from the hands of GPs to their investors.

Indeed, in an honourable attempt to stave off competition and raise new funds in an otherwise slow investment climate, several GPs have made concessions on terms and conditions for their LPs. Carlyle agreed to share more fee income with its limited partners of the private equity firm's fifth fund in November, while TPG told its investors that it planned to return $20m in fees paid out on its $19bn buyout fund. However, these GPs are not representative of the industry as a whole, as several LPs are still irked by the high fees they are paying when managers are not putting money to work.

Today, in the setting of a New York hotel, executives of TPG, KKR, Carlyle Group, Avenue Capital Group (one of the first managers to endorse the ILPA guidelines) and Silver Lake Partners are finally expected to meet with their investors to discuss giving LPs more rights and lower fees. Comments on the ILPA's proposed principles and the regulatory climate are understood to be topics on the agenda.

The meeting is a marked shift in the industry, as GPs, according to one unnamed investor, used to be able to fax over LPA terms to LPs for a signature. Not so anymore.

In fact, limited partners are becoming even more selective about which managers they choose to invest their money with. CalPERS, the largest US public pension fund, said in February it plans to reduce the number of private equity firms it invests with in an effort to increase returns and reduce costs. The LP has set a June deadline to "prioritise and streamline relationships" - meaning it will now allocate a larger share of its assets to top performers. This means that managers will have to work twice as hard to appease their investors.

While many do not expect a defined outcome from the meeting, one LP has suggested that managers may decide to lower management fees, but offset this by charging a higher performance fee. The ILPA, however, is first and foremost concerned with how and when fees are paid. Under the group's guidelines, the transaction and monitoring fees would be structured so that the vast majority of them would be passed along to LPs.

Today's meeting was organised by ILPA and moderated by Joseph Dear, chief investment officer of CalPERS. Attendees include 12 to 15 institutional investors such as representatives from Canada Pension Plan and the Abu Dhabi Investment Authority, along with senior executives from a number of buyout firms.

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