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By: Jonathan McCullough, James McClary and Elizabeth Dylke, Bennet Jones

The Institutional Limited Partners Association (ILPA) recently released the latest version of its principles, ILPA Principles 3.0. The updated principles provide a detailed selection of best practices for participants in the private funds industry, and are informed generally by guidelines of transparency, good governance and the alignment of interests among partners.

When the private equity investment model was first introduced in the early 1990s, it represented a significant improvement for investors over the model for publicly traded investments or mutual funds. The interests of managers and investors were better aligned through the requirement for managers to invest alongside the investors, to be paid a fee which covered operating costs and only to profit out of performance after investors had received a target return. There is concern that over time, this alignment has been gradually eroded. Management fees from multiple funds became a source of profit, and that excess was often applied to satisfy the manager's investment or 'skin in the game'. The ILPA Principles 3.0 represent an effort by institutional investors to restore that alignment.

Here are some of the highlights of ILPA Principles 3.0:

Fair and Reasonable Management Fees Based on Actual Operating Costs

The rationale for management fees should be clear to Limited Partners (LPs), as excessive fees will create a misal......................

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