A coalition representing the world's largest pension and sovereign wealth funds has formally requested that buyout groups begin paying a fraction of the runaway legal costs required to draft their own completely opaque investment vehicles.
The Institutional Limited Partners Association released a framework Tuesday asking private equity giants like Blackstone, Apollo, and KKR to share the burden of skyrocketing legal fees. Under current industry conventions, investors foot the entire bill when elite corporate law firms are retained to write the complex partnership agreements that ensure those same investors have zero operational control over their billions.
The legal expenses, which routinely see senior partners at firms like Kirkland & Ellis billing upwards of $2,500 an hour, are passed directly to the limited partners as standard fund expenses. Buyout shops have historically maintained that forcing teachers' pensions to pay the lawyers hired to negotiate against them is a necessary mechanism to align market incentives.
The limited partners are paying for a premium legal product, which in this case is a 600-page indemnification clause ensuring we are never personally liable for losing their money.
Representatives for the pension funds noted that legal fees for a single mid-sized buyout fund can now exceed $5 million before a single asset is purchased. The costs are primarily driven by the hundreds of billable hours required to invent new legal definitions of the phrase "management fee" and to establish the fund's absolute right to ignore its backers for up to twelve years.
The major private equity firms have acknowledged receipt of the investors' request. Internal memos indicate the buyout groups are treating the matter seriously, and plan to retain outside counsel to bill the pension funds an additional $3 million to formally decline it.