This article focuses on the growing role of Limited Partner Advisory Committees (LPAC), and suggests 10 ways to improve them for the mutual benefit of LPs and GPs.
LPACs are now de rigueur for closed-ended investment funds. What began primarily as a forum for discussion has morphed into an increasingly broad oversight role; an LPAC’s remit now often includes approval of: conflicts, new key persons, partnership extensions, follow-on investments, waivers of investment restrictions, and changes of control of the GP.
A well-run, representative LPAC can be a very useful tool for GPs, allowing them to have matters like conflicts or investment restriction waivers approved by a core group of investors who are informed and responsive. The LPAC can also provide a useful sounding board for other matters.
When codifying and operating the LPAC, the following principles of best practice should be followed to try to ensure that your LPAC is helpful and not helpless. 10 Ways to Improve your Limited Partner Advisory Committees:
1. Committee rules
- LPAC members should be able to consult privately without the GP in attendance. Circulate a contacts list to facilitate inter-member communication.
- Hold meetings at least once a year. Ensure that emergency meetings can be arranged on short notice i.e. less than 48 hours.
- The GP should normally hold the chairmanship of the LPAC, allowing it to schedule meetings and propose the agenda. But voting rights should be confined to LPs not affiliated with the GP.
- Provide the LPAC with regular updates in writing or by conference call. Background information for votes to be taken at meetings should be provided to members in good time.
- The LPAC may also benefit from external advisers’ evaluation of complex legal or financial issues. The fund should meet such advisers’ reasonable fees and expenses.
3. Stable composition
- LPAC members should not be able to cycle through representatives; consistent attendance by the same individuals makes it easier for the GP to build relationships with LPs and can forge a team mentality among LP representatives.
- The addition (and elimination) of LPAC seats should be subject to the consent of the GP and a majority of the existing LPAC membership.
4. Observer status
- Observer or ‘silent’ information rights are sometimes conceded by GPs during fundraising, but GPs should be careful about granting these rights. An observer does not share the responsibility that goes with actual LPAC service.
- Where an LP receives sensitive information without the context of LPAC conversations, it could also compromise confidentiality or undermine the privileges of LPAC members.
5. Size matters
- Maintain a manageable number of representatives. For most funds, the LPAC will comprise between three and twelve members. The actual size will be partly driven by the fund’s AUM and number of big institutional investors, who often expect LPAC membership.
6. Due process
- Draft clear, comprehensive minutes of LPACs meetings. It is beneficial to show that due consideration was given to the topics discussed, particularly conflicts and valuation issues. As a general rule, limit circulation of minutes to LPACs members, rather than all LPs.
7. Liability protection
- Check that D&O insurance coverage is extended to LPACs members in the performance of their duties. Importantly, the LPA should provide that LPACs representatives and the LPs they represent are not liable to the GP, other LPs or the fund and will be indemnified by the fund except for actions taken in bad faith.
8. Appointment of LPAC
- Recommend adopting a pre-defined, transparent process / procedure for appointing LPAC members.
9. Deemed consent
- We have encountered situations where LPAC members have been reluctant to take a decision on conflicts of interest, investment restrictions or other important checks. Often, this is down to LPs’ concerns about potential fiduciary liability, as they have a more overt role in the investment evaluation process. But the outcome is that the management can be significantly hampered, particularly in the context of a live transaction.
- The problem can be mitigated by deeming consent; if the LPAC chooses not to vote on a question within a specified timeframe, its consent is deemed to be given.
- An alternative is to give the LPACs veto rights (as opposed to approval rights), which means it can only prevent matters it disagrees with. However, the drawback is that the GP would not then receive the comfort of an LPAC consent if its decisions are challenged.
10. Remit to be clearly drafted
- Review the terms of the LPA – if the LPAC’s rights, composition, voting procedure, etc are not abundantly clear, consider amending the LPA to minimise confusion.