Maximizing Your LPAC: Best Practices and Must-Have Rights
>> If you can negotiate just one right in a Side Letter, securing membership on the Limited Partner Advisory Committee (the “LPAC”) should be your top priority. But LPAC membership is functionally worthless unless the LPAC is properly structured, the General Partner agrees to certain governance practices, and you get several other key side letter rights…
The Problem
It is remarkable that after investing tens if not hundreds of thousands of dollars in FTE hours of due diligence, operational due diligence, and document review, little to no focus is placed on the function and practice of the LPAC. Indeed, of all the rights available to a Limited Partner, a seat on the Fund’s LPAC is arguably the most valuable. And while all sophisticated institutional allocators know this, few of them know (1) the best practices that should govern LPACs, (2) the key functions of the committee, and (3) those “secret” rights that every allocator should obtain. Below we outline those terms which are best practice, must-have essential terms, and common compromises.
The Solution
LPAC Best Practices. LPACs can either serve as meaningful governance bodies or as a mere fig leaf for the GP. To assess the strength of your LPAC, consider the following best practices:
1. Frequency of Meetings:1
For buyout funds and growth equity funds, does the LPAC convene at least semi-annually?
For distressed debt, private lending and other multi-asset funds, does the LPAC meet at least quarterly?
2. Advance Distribution of Materials: Are the LPAC presentation and agenda circulated to LPAC members at least two full business days before each meeting?
3. Portfolio Review Time: Are at least two hours of each meeting set aside for in-depth review of the Fund’s portfolio?
4. Sponsor Interaction: Are at least 30 minutes of each meeting reserved for a Q&A session with the Sponsor?
5. In-Camera Discussions: At each ordinary meeting is an opportunity for “ex officio” conversation provided after the meeting (such that LPAC members can talk among themselves without the Sponsor listening in?)?
6. Meeting Minutes: Are written minutes of the LPAC meeting both (1) taken and (2) distributed to LPAC members in a timely manner?
7. Transparency in Communication: Are all matters brought before the LPAC only discussed in front of all LPAC members, rather than in private conversations between individual members and the Sponsor beforehand?
8. Conflict of Interest Disclosures: Are all material conflicts of interest presented to the LPAC for review and consent?2
9. Member Participation Rights: Do LPAC Members have the right to:
Grant a proxy to another member by simple writing?
Call an LPAC meeting with the consent of 50% of the members?
Participate in meetings via any communication method that allows all members to hear and be heard by all other members?
10. Access to Legal Counsel and Experts: Does the LPAC as a committee have the right to:
Engage legal counsel and other experts with the associated costs treated as a partnership expense?
Receive reimbursement by the Partnership for reasonable out-of-pocket expenses incurred in connection with the LPAC?
In the rest of our writeup, we look at:
Must-have terms
Common Compromises
Key Side Letter Rights
Takeaways
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1 Highlighted to indicate top priority.
2 See our article “LPAC as Protector” for a more in-depth discussion.
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