The Institutional Limited Partners Association (ILPA) is seeking to overhaul longstanding PE fund formation practices, arguing that “runaway legal costs” are increasingly burdening investors and distorting incentives across the industry, according to a report by the FT.
The influential investor group, which represents pension funds and sovereign wealth funds, has criticised the established structure in which investors in private equity funds pay not only their own legal expenses but also those incurred by buyout managers during negotiations to establish investment vehicles.
ILPA chief executive Jennifer Choi said the arrangement is increasingly difficult to justify in a mature industry, questioning why investors should effectively fund both sides of legal negotiations. She argued that the structure removes pressure on managers to control costs, contributing to escalating fees.
The body said the model has helped drive significant growth in top-tier law firms specialising in fund formation, with firms such as Kirkland & Ellis LLP benefiting from sustained demand. One leading firm has recently surpassed $10bn in annual revenue, reflecting the scale of legal spending tied to fund structuring activity.
ILPA’s proposal seeks to revise what it describes as an outdated cost allocation framework, suggesting that legal expenses should be shared more equitably between general partners and limited partners once spending exceeds defined thresholds.
Under its recommendations, legal, administrative and compliance costs would be capped relative to fund size, with excess expenses shared between managers and investors. The group also called for greater transparency in billing practices and more competitive selection of external counsel for large funds.
The association argues that the private equity industry’s rapid expansion over the past two decades – from roughly $550bn in assets in 2000 to around $8tn in 2022 – has fundamentally altered the rationale for current cost structures, which were originally designed for a much smaller and less mature market.
ILPA added that legal service providers operating on billable-hour models have been able to capitalise on the imbalance between fund managers and investors, further amplifying overall costs borne by limited partners.
The proposals come at a time of broader tension between private equity firms and their backers, as institutional investors increasingly scrutinise fees, governance practices, and alignment of interests following a prolonged fundraising slowdown in the sector.
ILPA has also recently raised concerns about conflicted transactions within the industry, including the rising practice of firms selling portfolio companies between funds under common management, highlighting growing calls for tighter oversight and improved transparency across private markets.
