Private equity funds remain an attractive option for an ever-expanding group of investors. However, they are often insufficiently aware of the unique governance challenges that these funds present. For adequate governance, it is crucial that investors rely on the Limited Partners Advisory Committee (LPAC), which oversees the fund manager (General Partner, GP). In practice, this oversight often turns out to be more ceremonial than intended, especially for smaller investors. This article examines what an effective LPAC mandate should look like to protect the interests of all investors, regardless of their size.

The LPAC is formally intended to represent the interests of Limited Partners (LPs) and must oversee the activities of the GP, particularly in cases of conflicts of interest. Unfortunately, the LPAC often proves to be weakly structured, with members frequently lacking the specific legal and financial expertise needed to effectively monitor the GP. Moreover, LPACs are often not timely involved in significant decision-making, leading to a decrease in their influence.

It is important to recognize that there is often a power imbalance between large and small LPs, arising from the negotiation of the Limited Partnership Agreement (LPA) and bilateral agreements between the GP and LP, as outlined in a side letter. Larger investors tend to negotiate their interests more effectively, which undermines or harms the position of smaller investors.

An effective LPAC mandate is crucial for the protection of all LPs and must be negotiated before signing the LPA. The Institutional Limited Partners Association (ILPA) provides guidelines for a well-functioning LPAC, including access to information, clear powers, and transparent decision-making, which are essential for assessing conflicts and protecting LPs. Additionally, it is important to properly structure the systems and processes of the LPAC, ensuring that members possess sufficient expertise, including legal, tax, and investment knowledge, to ask critical questions and assess conflicts effectively.

Furthermore, the LPAC should meet regularly or on an ad-hoc basis and have timely access to all relevant information regarding conflicts, investment decisions, and overall fund performance. There is a belief that LPACs that meet more frequently and are involved early in decision-making typically achieve better governance and higher returns. Finally, there should be a system of equal representation in which both large and small LPs can exert sufficient influence.

Conclusion: The Limited Partners Advisory Committee must be more than a formality; it must be an effective oversight body that genuinely represents the interests of all investors. A well-structured mandate, with clear powers and access to information, is essential for ensuring that all LPs receive the protection they deserve in a private equity fund. A strong LPAC not only promotes better governance but also enhances investor confidence in the fund. It is time for both large and small LPs to collaborate for an LPAC that defends their collective interests.