Private equity advisory board responsibilities
Private equity firms aren't required to have advisory boards so their responsibilities are not common knowledge, but advisory boards can serve important and beneficial functions for general partners of the firm. A Limited Partner Advisory Committee (LPAC) serves a different role than an advisory board and this group can also provide valuable benefits to private equity firms.
Small private equity firms usually don't have a private equity advisory board or an LPAC. Advisory boards are extremely helpful to the general partner when getting a new private equity firm established and they're helpful in other types of activities and transactions as well.
The Role of the Private Equity Fund Advisory Board
The private equity fund advisory board is formed for the purpose of assisting investment advisors with sourcing transactions and as a resource for industry expertise for advisors. Advisory boards don't have any authority to control a private equity fund or to act on its behalf. Private equity fund advisory boards are extremely helpful to general partners when they're setting up a private equity fund and through the life of it.
For startup private equity firms, advisory boards can sometimes lend credibility to the firm and to the general partner. Forming an advisory board can be an important asset for new managers and managers of smaller funds. Advisory board members may help general partners in finding investors with the proper credentials to invest in the private equity fund. General partners may ask those investors to join the advisory board to assist more in the fundraising process than to serve in an advisory capacity.
In 2017, the Securities and Exchange Commission (SEC) changed its solicitation rules under Rule 506(c), so that general partners could broadly solicit and advertise an offering as long as all purchasers in the offering have the proper licenses and the issuer takes responsibility for verifying the purchasers' accredited investor status, and they meet certain other conditions outlined in Regulation D.
The Composition of the Advisory Board
Advisory board members should be industry experts or service providers within the same financial industry as the private equity fund. Established private equity fund managers are good choices to serve on an advisory board for an emerging manager or manager of a small fund, as long as the potential advisory board manager isn't a direct competitor of the private equity fund.
General partners will also benefit by choosing an economic expert that specializes in analyzing the same types of asset classes as the private equity fund offers. As long as they aren't clients, service providers to the private equity industry are also good choices for an advisory board because they can answer questions related to ongoing fund operations, legal matters and accounting questions. The number of advisory board members is usually less than the number of members of the LPAC.
Advisory board members are sometimes paid for their service, but not always. General partners may offer them other types of compensation instead of pay. For example, general partners may offer them the chance to become limited partner investors in the private equity fund by offering them favorable terms or giving them a portion of the carried interest. The private equity fund should indemnify the members of the advisory board, except in instances of fraud or misconduct. Advisory board directors should be reimbursed for reasonable expenses related to their service on the advisory board.
The Role of the Limited Partner Advisory Committee (LPAC)
In addition to an advisory board, private equity firms may also enlist the help of a Limited Partner Advisory Committee (LPAC). The LPAC helps private equity firms deal with major issues like conflicts of interest, valuations and approvals for special circumstances.
Before entering into a related party transaction or a contract with an affiliated party, the general partner should get approval from the LPAC, unless the deal was disclosed and described in the governing documents of the private equity fund. As an example, if the private equity fund were to acquire assets from or sell assets to an affiliated party of the general partner or the private equity fund, the general partner should seek approval from the LPAC to protect against future lawsuits from the limited partner investors surrounding the terms of the transactions.
The general partner isn't allowed to enter into transactions that benefit him or her or one of their affiliated entities, but the general partner can avoid the conflict by having the LPAC approve it to avoid a conflict of interest.
The value of the private equity fund's assets may drive the amount and timing of the general partner's fee and other distributions. The value of the assets may also have an effect on the performance and financial reporting of the private equity funds. For these reasons, general partners should submit the methodology to the LPAC for review and approval.
General partners may also be required to get approval from the LPAC for such issues as extending an investment period, extending the term before they're required to liquidate assets, removing restrictions on the type of assets that may be acquired, and approving or replacing key people and team members who make investment decisions. The general partner and limited partner investors can use the LPAC as a way of dealing with conflict of interest transactions.
The LPAC also allows for some leeway in the private equity fund asset valuation. The LPAC can grant some flexibility to the general partner to alleviate restrictions in the governing documents of the private equity fund as a benefit of the limited partner investors. Institutional investors are more likely to invest in a private equity fund when an LPAC is part of the fund's structure.
Private equity firms can use advisory boards and an LPAC to help them remain in compliance with laws and regulations. It's crucial for private equity firms to follow the rules and regulations and to document their transactions very carefully. A board management system like Diligent Boards and the suite of digital tools that comprise Governance Cloud support secure, confidential communication between general partners and their advisory board and LPAC. In the event of an allegation or investigation, it will be easy for the general partner, the advisory board and LPAC members to supply the proper documents to prove their case. Diligent Boards can be set so that only authorized users have access to various parts of the portal, which will also help to prevent fraudulent activity.
