Key Takeaways
- • The Institutional Limited Partners Association (ILPA) is challenging a longstanding industry practice in which limited partners fund both their own legal expenses and those of general partners during PE fund formation negotiations, arguing the structure creates misaligned incentives and "runaway" costs.
- • ILPA CEO Jennifer Choi contends that in a mature industry, investors should not effectively subsidize both sides of legal negotiations, as the current model removes pressure on managers to control expenses and contributes to escalating fee structures.
- • Top-tier law firms specializing in fund formation—including Kirkland & Ellis LLP—have experienced significant revenue growth tied to PE fund structuring, with leading firms now exceeding $10 billion in annual revenue, underscoring the scale of legal spending at stake.
- • ILPA's proposal recommends capping legal, administrative, and compliance costs relative to fund size, with expenses exceeding defined thresholds shared between general partners and limited partners, along with increased transparency in billing practices and more competitive counsel selection for large funds.
Summary
The Institutional Limited Partners Association, a major advocacy group representing pension funds and sovereign wealth funds, is advancing a significant challenge to PE fund formation economics. The organization argues that the current cost allocation framework—in which limited partners bear responsibility for legal expenses incurred by general partners during fund negotiations—is no longer justifiable in a mature industry and contributes to cost inflation across the sector.
ILPA CEO Jennifer Choi has articulated the core concern: investors are effectively funding both sides of legal negotiations without corresponding pressure on managers to exercise cost discipline. This structural imbalance, according to the group, has removed important market incentives for expense management and enabled continued fee escalation. The arrangement has been particularly lucrative for top-tier law firms specializing in fund formation, with market leaders such as Kirkland & Ellis LLP now generating more than $10 billion in annual revenue—a scale reflecting the aggregate legal spending embedded in PE fund structuring activity.
The association's remedial framework proposes a more equitable cost-sharing model. Under ILPA's recommendations, legal, administrative, and compliance expenses would be capped at levels proportional to fund size. Any spending exceeding these thresholds would be shared between general partners and limited partners, creating aligned incentives for cost control. The proposal also calls for greater transparency in billing practices and mandates more competitive selection processes for external counsel on large funds, aiming to introduce market discipline into law firm engagement.
This initiative reflects broader institutional investor pushback against fee structures that have accumulated across private equity over the past decade. By targeting fund formation costs specifically, ILPA is addressing a category of expenses that has grown substantially yet remained largely invisible to mainstream investor scrutiny. The proposal, if adopted industry-wide, would represent a material shift in PE economics and could constrain both manager revenues and law firm billing opportunities.
ILPA CEO Jennifer Choi has articulated the core concern: investors are effectively funding both sides of legal negotiations without corresponding pressure on managers to exercise cost discipline. This structural imbalance, according to the group, has removed important market incentives for expense management and enabled continued fee escalation. The arrangement has been particularly lucrative for top-tier law firms specializing in fund formation, with market leaders such as Kirkland & Ellis LLP now generating more than $10 billion in annual revenue—a scale reflecting the aggregate legal spending embedded in PE fund structuring activity.
The association's remedial framework proposes a more equitable cost-sharing model. Under ILPA's recommendations, legal, administrative, and compliance expenses would be capped at levels proportional to fund size. Any spending exceeding these thresholds would be shared between general partners and limited partners, creating aligned incentives for cost control. The proposal also calls for greater transparency in billing practices and mandates more competitive selection processes for external counsel on large funds, aiming to introduce market discipline into law firm engagement.
This initiative reflects broader institutional investor pushback against fee structures that have accumulated across private equity over the past decade. By targeting fund formation costs specifically, ILPA is addressing a category of expenses that has grown substantially yet remained largely invisible to mainstream investor scrutiny. The proposal, if adopted industry-wide, would represent a material shift in PE economics and could constrain both manager revenues and law firm billing opportunities.
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