Summary
VC and equity firms have recently come under pressure to change some of their practices. In the past, those that have incorporated self-governance to ward-off forced changes have found the new requirements to be more lenient and less costly.
Analysis
As industries come under pressure for reform from government agencies, it is much better to find resolutions from within than to have the government force regulations. Alcohol distillers and distributors began raising drinking-and-driving awareness and stock-brokerage firms developed the CFA in an effort to keep the forced reform at bay. Without self-governance, forced changes could be much stronger and more costly to the companies involved.
VC and equity firms have recently come under pressure to change some of their practices. The ILPA , an organization that represents LPs investing in the private equity asset class, issued a document today that tackles some of the central issues, including clawbacks, distribution waterfalls, transaction fees and style drift. With the current environment in which limited partners believe that terms and conditions on private equity funds swung too far in favor of their fund managers during the boom years, reform in practices was needed.
Because the document was constructed from ILPA members and some non-member LP’s, it would appear the changes will be acceptable and enforceable. If this document were to be rejected, expect forced reform to be much stronger.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
