On June 27 2019, the Institutional Limited Partners
Association (ILPA) issued the third version of the private
equity principles (principles). The principles continue to
reiterate that the essence of an effective private equity
partnership is built on the alignment of interests, governance
and transparency; however, this third version also addresses
Over the past few years, local pension funds and insurance
companies have been increasing their requirements for investing
in a fund, basically based on ILPA principles. Therefore,
understanding how the third version of the principles applies
to the Colombian private equity industry is crucial for a
general partner (GP) interested in raising money from Colombian
limited partnerships (LPs).
The principles strongly encourage joint and several
liability of individual GP members. In Colombia, regulations
foresee the liability of the GP, and a joint and several
liability with GP members is not established by law in Colombia
and is not the standard. However, in cases where the GP is a
brand-new company, it would be possible to agree on a several
liability with a substantial parent company.
On another issue, the principles recommend that LPs consider
the application of key person provisions following the
investment period, since the harvest period is critical for
investments. Local regulations do not provide any specific
rules on this matter, but usually the local industry agrees on
regulating consequences in cases where a key person is absent
after the investment period.
Another relevant point is that the ILPA provides that the
fund's term should be limited to a maximum of two extensions.
Colombian regulations do not set forth a maximum term. It is
the LPs that determine the term of the fund and the number and
length of the extensions. Pension funds and insurance companies
cannot accept in-kind distributions; therefore, the term of the
fund would depend on the liquidity of the assets and more
importantly on the exit plan developed by the GP.
In conclusion, although the principles try to reconcile both
the LPs' and GPs' interests, LPs should be open for
negotiations since the application of these best practices is
not mandated by local regulations; likewise, their application
is not yet a mandatory local standard by virtue of some
differences that exist between these practices and the
investment regime of local institutional investors.