The influence of Limited Partner Advisory Committees or LPACs is growing globally, driven by LP and regulator need for greater fund transparency and independent governance. LPACs are a relatively recent phenomenon, probably less than a decade old. And as such, there is wide divergence on the role, makeup, scope, and power of LPACs, with each manager taking a nuanced approach.
LPACs advise the GP on conflicts of interest and significant changes to fund governing documents when LP approval is necessary. GPs can also seek out the advice of the LPAC on other material matters, as they see fit.
A Seat at the Table
LP interest in LPACs does make it clear that investors want to play a much more decisive role in fund governance. According to Vistra’s research report titled “Private Equity Fund Governance: Establishing Best Practices 2017—The Manager & Investor Perspective”, many of the LPs polled noted a dissatisfaction with governance structures used by the private equity industry. LPACs are seen as one way to address just that.
Malcolm Pobjoy, Group Commercial Director, North America, at Vistra, notes that LPACs are increasingly being used for input on material items that guide the direction and decisions of the fund. “This is partly being driven by the stronger involvement from the institutional investor base, who are demanding a seat at the table and then ensuring they are attending and giving input,” he adds. “This active involvement has grown over the past few years from a more passive approach historically.”
While most of the globe’s LPs remain focused on LPACs, LPs in China seem to be less concerned. According to Catherine Law, Senior Manager, Business Development, Alternative Investments, at Vistra Hong Kong, GPs in Asia are less aware of LPACs, as their LPs do not require it or aren’t even aware of the benefit of having them. She adds, “Many Asian LPs are family office or UHNW/HNW individuals, who are not as sophisticated as some of the institutional LPs.”
A Need for Professionalization
China may be the outlier though. Industry leaders do indicate that the majority of private equity funds do have a LPAC in place. In fact, a worldwide study by IFI Global and Vistra found that 100% of the LPs surveyed requested an LPAC to be in place before investing, and 100% of the funds represented in the report said that they had an LPAC currently in place. Despite the push for LPAC involvement, LPs are also realistic about how the lack of standardization serves to somewhat undermine the role of LPACs.
Of the LPs surveyed by IFI Global and Vistra, 80% were in favor of further professionalization of LPACs. Pobjoy notes, “The wide variance of implementation makes it a difficult subject to create a holistic report or analysis of.” Time may just remedy the problem. Julian Carey, Head of Client Services-Associate Director at Vistra Guernsey, concludes, “As the role and scope of advisory function evolves and becomes more understood, and the institutional and HNWI LPs become more experienced themselves with PE investing, the function of LPACs will certainly become more formalized.”
The Selection Process
The one thing that does appear to be more consistent when it comes to LPACs is the selection process, and that’s not expected to change. The majority of GPs surveyed in the Vistra research report picked LPs by the size of their allocation—a pretty common practice. “If an LPs allocation constitutes at least 10% of the fund, it is generally thought that they have a right to be on the LPAC,” the report states.
As investor mix grows and diversifies, there’s always a question about who will get a spot on the LPAC. “By setting a minimum commitment size, it neutralizes the GPs’ decision a bit,” says Jennifer Choi, Managing Director, Industry Affairs, for the Institutional Limited Partners Association.
The Future Benefits
And while LPs push for a spot on LPACs, GPs are coming to terms with just what their growing influence might mean. “LPACs act as a sounding board, in the broadest sense,” says Choi. “The value to the managers is that it insulates them in the management process, and it gives the GP a way to normalize decisions. The LPAC gives GPs a better way to understand how the LPs think.”
Whatever the current approach a fund takes to LPACs, it certainly seems there is change on the horizon to improve the governance and transparency of private equity funds.
Further insights on the current state of play in the private equity fund governance market from both an industry and investor perspective can be found in our 2017 Private Equity research report.
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