FORTUNE — The SEC is investigating private equity for its alleged systemic use of “hidden” fees charged to portfolio companies and investors. Some of this involves charging portfolio companies for access to “operating partners” that investors had been led to believe were salaried employees of the firm. Some of it relates to miscommunication over which types of expenses are to be born by the fund as opposed to by the general partnership. Some of it may involve outright fraud.
Each situation is different, but there may be a common salve: Standardized limited partnership agreements.
To be clear, I’m not suggesting that all private equity firms charge the exact same management fees or take the exact same carried interest. Nor that each fund need have the same management structure or investment strategy. Instead, I’m arguing for the creation of an expansive “fill-in-the-blank” and “check the box” sort of document (or group of documents, given that there are certain jurisdictional specifications depending on where a fund and limited partner is based).
The fundamental principle of a standardized LPA should be fee inclusion. Rather than enumerating which fees are to be shared with limited partners (as many current LPAs are written), it would start from the opposite perspective: All fees are to be shared with LPs, with any exceptions to be enumerated. Same goes for expenses. All should be borne by the general partnership, save for those explicitly exempted in the LPA.
And then the coup de grace: No more side letters.
Now I know what certain GPs and fund formation attorneys are thinking: If you nix side letters, then every LP will know the deal every other LP is getting. For example, the fact that CalPERS is paying a lower management fee on its $100 million commitment than Family Office X is paying for its $5 million commitment.
Get over it.
First, most LPs recognize that there is value to “buying” in bulk. Second, private equity firms talk nonstop about alignment of interests. If a GP is putting in terms for favored LPs that are so embarrassing/egregious that it would cause smaller LPs to avoid subscribing, then perhaps the real problem is with those agreements rather than with the disclosure.
Moreover, standardized LPAs should reduce legal and accounting fees. Not only when drafting documents, but also when dealing with SEC presence exams and possible audits. And if you don’t want to lose your fund formation attorney’s special brand of creativity, ask him or her to work with the Institutional Limited Partners Association (ILPA) — which finally is beginning to draft such documents after several years of the issue being raised and then falling by the wayside.
Private equity is an investment strategy largely predicated on market inefficiencies. But there’s no reason for that buzzword to continue extending to the investor relations process. Standardized LPAs would be a giant step toward ensuring that limited partners really are partners, and not well-heeled dupes.
Sign up for Dan Primack’s daily email newsletter on deals and deal-makers: GetTermSheet.com
