Our thanks to both Vistra and IFI for preparing this very informative survey.
Rethinking the LPAC
To focus on one topic discussed, the sense of both the survey and panelist comments was that the LPAC, as a governance model, is faulty. Indeed, while 100% of the investors surveyed require an LPAC – 100% of investors also stated that they are “not satisfied” with the governance structures employed in the private equity industry. That is a pretty damning statement as to the current status quo.
Among topics discussed:
Aside from the above, Castle Hall is also concerned when the same investors serve on the LPACs of different vintage funds. If Fund V sells an asset to Fund VII, there is a conflict and appearance of self-dealing if the same sub set of investors approve both sale and purchase across different fund entities (especially when LPAC meetings are, to all extents and purposes, held concurrently in a commingled, single forum). It is also notable that the investor appointed LPAC representatives approving both sale and purchase are typically front office investment professionals, compensated based on the performance of funds overseen. Looking forward, a pivot towards LPAC membership being staffed by investor compliance and governance specialists may bring greater objectivity to challenging governance questions.
All of the above raises a fundamental question – why are private equity funds structured as limited partnerships in the first place
It is pretty clear that the LPAC is a half-way house which – especially in contentious situations – may prove to be unfit for purpose.
The answer to better corporate governance in the PE space is relatively obvious: structure all alternative asset vehicles, including PE (and real estate and infrastructure), as corporate entities, each with an active, independent board of directors. Under a corporate structure, PE would move out of the legacy contractual world of individually negotiated partnerships into a more clearly defined framework of board responsibilities and corporate law. And yes, it is possible to handle tax issues with a corporate rather than partnership fund entity for the significant majority of investors.
At present, the idea of a PE vehicle which is not a limited partnership seems to be a black swan for many PE industry participants. Given the evident weaknesses of the LPAC model, however, it may be time to challenge the status quo.
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