One of the ways the industry facilitates an interactive relationship between the GP and LPs is through the use of an LPAC. A well-functioning LPAC should help ensure good governance of the fund by addressing conflicts of interest and be a helpful resource for the GP. Just as GPs bring the benefit of their wider investment experiences to portfolio companies, LPs can provide useful insight from their fund investing experience to the GP on the basis of the more detailed information provided to LPAC members.
In some jurisdictions, maintaining the limited liability of LPs makes it important that LPs do not become involved in the management of a fund, i.e. LPs should not be involved in making investment or divestment decisions. This should be the sole responsibility of the GP. LPAC members provide advice in the best interest of the fund but they do not have fiduciary duty to other LPs.
The LPAC is most effective when it acts as a sounding board for the GP on all matters which impact the governance of the fund. The LPAC ought to be consulted on all conflicts of interest and other significant matters as set out in the fund documentation. In many cases the LPAC will be required to give its consent to the treatment of certain governance issues including conflicts of interest under the terms of the fund documents.
The LPAC should not become a barrier to the GP communicating directly with all LPs in the fund. For example, while the LPAC can provide a useful forum for discussion and feedback to the GP, changes which will impact all LPs need ultimately to be put to all LPs.
To be of greatest value to the GP, the composition of the LPAC should be thought about carefully to ensure a balanced range of perspectives are included. The individual members of the LPAC should have an appropriate level of fund investing experience so that a full contribution to discussions can be made.
The role and constitution of the LPAC should be described in the fund documents. It is usual for members of the LPAC to be indemnified by the fund and for it to be clear that there is no fiduciary duty owed by members of the LPAC to the rest of the LPs in the fund.
There should be a separate LPAC for each fund raised by the GP.
LPACs should be run on a good governance basis, with the agenda and supporting papers circulated ahead of the meeting. Members should declare any conflicts at the start of the meeting and formal minutes should be taken and circulated in a timely fashion. The minutes of any LPAC meeting may also be made available to all LPs.
LPAC meetings should be held at least once a year and should be capable of being convened, at the request of the GP or any of the LPs, at other times.
The LPAC may be chaired by either the GP or one of the LPs. The names of those LPs on the LPAC should be made known to all LPs in the fund. LPAC meetings should provide for discussion without the GP being present.
The number of members on the LPAC should be appropriate for the size of the fund but not so large as to make effective discussion difficult.
LPs on the LPAC must be careful to respect the confidentiality of the information received and discussions held in these meetings.