LP Advisory Committee
LP Advisory Committees The vast majority of private investment funds have limited partner advisory committees (a.k.a. advisory boards, conflict committees, valuation committees, etc.) (LP Advisory Committees). LP Advisory Committees are composed of representatives of limited partners, usually significant institutional limited partners, that are appointed by the general partner and almost invariably serve without compensation. While occasionally viewed by general partners as a potential burden, LP Advisory Committees can be a very useful tool for general partners, allowing them to have conflicts or investment restrictions waived by a subset of limited partners who are informed and responsive and by providing a useful sounding board for other matters.
These LP Advisory Committees should be distinguished from the occasional fund manager’s industry advisory board composed of persons who are experts in the fund’s investment focus and who provide advice and market insight to the general partner, often in exchange for a share of carry or an opportunity to invest in the fund on favorable terms.
Role of LP Advisory Committees
The role of LP Advisory Committees varies from fund to fund but they are primarily related to three broad categories: (i) conflicts of interest, (ii) waivers of restrictions in the partnership agreement, and (iii) general oversight.
Conflict of Interest Transactions
The traditional role of an LP Advisory Committee is to act as a decision making body with respect to conflicts that may arise between the interests of the limited partners and the interests of the general partner in the course of the life of the fund. In order to resolve these conflicts, the LP Advisory Committee is typically given the right to approve or disapprove conflict-of-interest transactions and, if approval is received, the terms of the partnership agreement typically provide that the general partner will be insulated from conflict claims by other limited partners with respect to an approved transaction. These transactions may encompass any of the following:
- Investments in portfolio companies of affiliated funds
- Purchases of securities from or sales to affiliates of the general partner
- Affiliates lending to the fund
- Service contracts with affiliates of the general partner
- Approval of the valuation methodology employed by the general partner or the right to review and approve or disapprove the valuations prepared by the general partner
Override of Partnership Agreement Restrictions
Another traditional role of LP Advisory Committees is to waive certain restrictions or thresholds set forth in the fund’s partnership agreement. When such powers are included in the limited partnership 2 agreement and agreed to by all the limited partners, the LP Advisory Committee can exercise its discretion to take certain actions that may include, without limitation, any of the following:
- Approval of partnership term extensions
- Approval of new key persons
- Approval of follow-on investments after the expiration of the investment period
- Waiver of investment restrictions (e.g., caps on investment in a single portfolio company, in public securities or in foreign companies)
- Approval of a change of control of general partner or investment manager
An LP Advisory Committee sometimes takes on a greater role in oversight and provides transparency with respect to the activities of the fund and the general partner by receiving sensitive financial and other data that may include, without limitation, any of the following:
- Additional financial reports (e.g., detailed expenses, receipt of portfolio company fees)
- Access to fund auditors
- Approval of variances from GAAP accounting
- Reports on defaults, potential litigation, or other significant events
Understanding Limited Partner Concerns
Limited partners have limited liability because they do not participate in the day-to-day business of a fund. Service on an LP Advisory Committee generally will not jeopardize this status. In fact, Delaware law has a very clear list of what does not constitute participation in the day-to-day business of the fund,1 and service on such committees is listed among many other permitted activities.
However, as LP Advisory Committees appear to be taking on an ever-widening scope of responsibilities and oversight, there is some concern among limited partners that LP Advisory Committees may in some circumstances be taking on more responsibility than is prudent even if they do not rise to the level of being viewed as general partners. This concern arises when the LP Advisory Committee is making decisions that might best be considered by all the limited partners or when decisions fall beyond the scope of expertise or the functions of the LP Advisory Committee.