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 new issues.
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.