KKR Lends Influential Name to Private Equity Best Practice Guidelines

(March 9, 2011) — The famed private equity firm Kohlberg Kravis & Roberts (KKR) has said that it endorses private equity best practices guidelines issued by the not-for-profit Institutional Limited Partners Association (ILPA).

“We are pleased to formally endorse the ILPA principles,” KKR’s Henry R. Kravis and George R. Roberts Co-CEOs and Co-Founders wrote in a statement. “We believe that the entire private equity industry – limited partners and general partners – will benefit from increased focus on the three basic tenets…For KKR, we believe the principle of alignment is at our very core, as evidenced by the fact that we have a meaningful amount of capital, more than $6 billion, from our executives and our balance sheet, at work in our private equity investments.” KKR further noted that while the firm’s existing and future funds will not adhere to each and every term outlined in the Principles, its endorsement reflects a general support for the efforts of ILPA and other industry supporters with the mission of improving the private equity industry for the long-term benefit of all of its participants.

The Private Equity Principles outlined three guidelines for private equity funds: 1) aligning investment firms and investors’ interests, 2) governance and 3) transparency. They also included recommendations on issues such as carry clawback and financial reporting.

ILPA’s Private Equity Principles were first published in September 2009, and have been endorsed by 140 industry organizations. In March 2010, pension fund giant California Public Employees’ Retirement System (CalPERS) and other investors met with executives from among the world’s largest buyout firms to discuss a range of “principles” introduced by ILPA.

The not-for-profit association’s mission, the firm said, is to restore and strengthen the delicate relationship between the endowment and pension funds that invest in private equity funds (the “limited partners”) and the private equity firms that invest and manage the capital (“general partners”). The ILPA, which represents investors, has introduced guidelines surrounding fund structures, which contains best practices relating to the alignment of interest between general partners and limited partners, fund governance, transparency and reporting.

Last year’s meeting with CalPERS and others showed that private equity firms are taking ILPA’s guidelines seriously and that investors – pension funds, sovereign-wealth funds and endowments – may want more control over the terms private-equity funds set. The get-together signaled a shift in the relationship between private equity firms and clients, who have traditionally accepted the terms managers proposed. After steep declines in buyout shops since ILPA’s guidelines emerged amid the financial crisis, firms have found it harder to raise cash and some of the largest fund managers have made concessions to mollify investors.

“We are very pleased with the level of support we have received thus far,” said Jeramaz-Larson last year in a news release. “It reflects the firm belief from institutional investors that adoption of the principles will help lead to a stronger, more sustainable industry and, ultimately, improved investment returns.”

ILPA has more than 240 institutional member organizations that collectively manage approximately $1 trillion of private equity assets.