The Legal Perspective: Essential LPA Considerations for Fee Validation

By Paul O’Shea

An LP Fee Validation Evolution – Fee validation has become a critical tool for LPs, as they look to validate the fee information that their GPs provide to their LPA terms.  Over the past year, Colmore has partnered with multiple LPs to streamline their current data collection efforts to actively monitor and validate fees, as part of an on-going LPA compliance and best practice exercise.  The frequency of discrepancies is not negligible:  the Los Angeles County Employees Retirement Association (LACERA) learned this in the last year through an external review of forty of their private asset funds[1].  Nearly 40% of their private equity managers “collected more than their contractually agreed-to share”.

Proactive LPs are taking on fee validation as a responsible and prudent measure as investors in the evolving and complex asset class of private assets to ensure LPA compliance.  The good news is that private asset General Partners (GPs) are increasingly complying with LP requests for fee templates such as the standardized ILPA Template, making this analysis easier and less expensive.

The Legal Take – Great, so you have decided to appoint a fee validator, or you are considering  leveraging the expertise of fee validation specialists in the future.  What can you do today that will best set you up for such a program?  Below, Colmore has outlined some crucial points that all LPs should keep in mind as they decide to commit to new funds:

  1. Ensure the LPA provides for the disclosure of sufficient costs and charges information – pursuant to the ILPA Fee Reporting Template or a form that can automate the capture such as our Colmore Custom Fee Validator Template
  2. Ensure the LPA provides for the disclosure of such additional data, information and assistance as is necessary to complete the fee validation process and investigate any discrepancies
  3. Ensure the LP is able to disclose this requested information and other fund-related information to a fee validation specialist team on a confidential basis
  4. Require the GP to interact directly with the investor’s fee validation team when investigating discrepancies

Fee Validation Expertise – Most importantly, an LP should weigh the time and cost benefits of appointing an LP fee validation team with highly-specialized expertise and established procedures not only for reasons of efficiency, but also for regulatory and reputation considerations:

  • The SEC noted that investors do extensive due diligence in the pre-investment stage, but only limited due diligence during the life of the investment, which is where the regulator frequently observed additional costs found their way onto the fund financials.
  • Public Institutions in the US are increasingly required to disclose the total costs and charges of their private asset programs. With disclosure, validation of the manually reported GP amounts becomes imperative.
  • A growing number of endowment and pensions’ internal audit teams are recommending validation exercises as a best practice.

[1] Sam Sutton, “Second review finds discrepancies in fees, carried interest paid by LA County,“ PE Hub Buyouts. PE Hub, September 18, 2017, (accessed July 27, 2018).


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