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This article is the second article in a two-part series that discusses business terms, which are the subject of frequent negotiation between investors and the sponsors of closed-end private equity funds. While Part I focussed mainly on economics, this article addresses governance, legal and other "softer" rights. Where applicable, we note the background legal and regulatory requirements surrounding fund sponsor and investor negotiations as well as our view on what is market. This article is written with the interests of both investors and fund sponsors in mind. It is not intended to be a complete analysis of all fund terms or of all legal and regulatory considerations applicable to funds, but is intended merely to provide investors and funds with a detailed overview to assist them in their negotiations.
In particular, we have omitted a discussion of most tax issues, although we include some of the more basic tax issues that can be important in fund negotiations. In discussing state law, we generally only discuss Delaware law as it relates to limited partnerships, which is the jurisdiction of choice for most funds. We discuss the Advisers Act, but the Advisers Act may not apply to certain private equity real estate funds that do not invest in securities. In addition, to the extent we consider the effect of the Advisers Act on fund business terms, we generally only consider the impact of Section 206 of the Advisers Act on fund business terms. Counsel should always be consulted.
In September 2009, the Institutional Limited Partners Association (ILPA) issued a position paper entitled "Private Equity Fund Principles," outlining its view on a wide array of fund business terms, including governance, economic, and reporting issues. The ILPA is an organization of over 200 institutional investor members from multiple countries. Members represent assets in the trillions of dollars. Leading members include the California Public Employees' Retirement System (CaIPERS) and the Ontario Municipal Employees' Retirement System (OMERS). Although some general partners suggest that the "Private Equity Principles" are one-sided, that viewpoint does not detract from the fact that everyone should know what is in them, even if they decide not to follow them. For this reason, we frequently refer to the "Private Equity Principles" in our discussion of fund business terms.