Exposing More Super Secret Private Equity Limited Partnership Agreements

Private equity fund managers keep insisting that private equity limited partnership agreements need to remain confidential or their businesses will suffer irreparable harm. We’ve already shown that claim to be ludicrous.

We published a dozen of these supposedly sacrosanct documents at the end of May. They had been accidentally made public by the Pennsylvania Treasury, but no one seemed to have noticed. They included funds of major industry players such as KKR, TPG, and Cerberus. Yet miraculously, they sky has not fallen in on their businesses as a result of the release of this information. We have obtained eleven more limited partnership agreements from a source authorized to receive them who is not bound by a confidentiality agreement. These include limited partnership agreements from Blackstone, Oak Hill, and New Mountain, as well as smaller players. You can see all these limited partnership agreements here.

There is a vital public interest in having this information in the open. Public pension funds, which are government bodies, are the biggest single group of investors in private equity, representing roughly 25% of total industry assets. Yet private equity limited partnership agreements are the only contracts at the state and local government level that are systematically shielded from public scrutiny, through state legislation or favorable state attorney opinions.

Yet in countries less captured by rampant free market ideology and private equity political donations, a revolt is underway against this secrecy regime. As the Financial Times reported:

Anger has erupted over the practice of asset managers coercing pension funds into signing non-disclosure agreements. Pension schemes argue it is uncompetitive and prevents them from securing the best deals for their members.

The imposition of confidentiality agreements means pension funds are not able to compare how much they are being charged by fund managers, potentially exposing them and their scheme members to unnecessarily high fees.

The practice is of particular concern with respect to public sector pension plans, which are effectively funded by the taxpayer.

David Blake, director of the Pensions Institute at Cass Business School in London, said: “Local authorities are not allowed to compare fee deals, and that is an outrage. It should be made illegal that fund managers demand an investment mandate is confidential.”

How do private equity kingpins justify their extreme demands for confidentiality, their assertion that limited partnership agreements in their entirety are trade secrets? Consider this “we’ll fight them on the beaches” argument from this Monday’s Private Fund Management, that if general partners, meaning the private equity funds, are forced to divulge fees, they’ll eventually have to expose more of the limited partnership agreement. And of course they claim that would do them competitive harm:

It’s impossible to have a debate about public pension plans disclosing their fee payments without first acknowledging why GPs want them kept private in the first place…

In this context, GPs are being portrayed as secretive and heavy-handed. But so far, what hasn’t been addressed properly is why GPs are apparently so keen to prevent fee receipts from entering the public domain in the first place.

Speaking to pfm off the record, no manager has ever told us that they consider management fees a vital trade secret. No one has defended the idea that disclosing them can make or break a firm.

What we are hearing instead is that GPs perceive the fee debate as a proxy battle for disclosing other data that really are sensitive to the firm’s ability to do business, such as the finer points of their investment strategies, key man clauses and the like. All these things are documented in the LPA, and if the LPA can no longer be subjected to non-disclosure, then sooner or later demands will be made to publish other types of fund-specific information also.

We pointed out when we released our initial round of limited partnership agreements that in fact, when you looked at the sections the general partners again and again cited as being hugely sensitive, there’s in fact nothing deserving of special handling:

For decades, private equity (PE) firms have asserted that limited partnership agreements (LPAs), the contracts between themselves and investors, should be treated in their entirety as trade secrets, and therefore not subject to disclosure under Freedom of Information Act laws in any jurisdiction. These private equity general partners argued that the information in their contracts was so sensitive that it needed to be shielded from competitors’ eyes, otherwise their unique, critically important know-how would be appropriated and used against them. In particular, PE firms have made frequent, forceful claims that their limited partnership agreements provide valuable insight into their investment strategies. The industry took the position that these documents were as valuable to them as the formula for Coca-Cola or the schematics for Intel’s next microprocessor chip.

Now that we can look at the actual language in limited partnership agreements, we can see what any sophisticated user of legal instruments would guess: the PE firm lawyers describe the strategy in the broadest, most general terms to give the private equity fund as much latitude as possible. For example, here is the investment strategy language from the KKR 2006 Fund:

2.1 Objectives The objective and policy of the Partnership are to invest in (i) Securities of Persons formed to effect or which are the subject of management buyouts or build-ups sponsored by the General Partner or any Affiliate thereof and (ii) Securities of Persons the investment in which the General Partner reasonably expects to generate a return on investment commensurate with the returns typically achieved in previous KKR-sponsored buyouts, build-ups and growth equity investments.

Claiming this statement is a trade secret is analogous to the U.S. Navy claiming classified status for the fact that it operates ships on oceans.

Moreover, if you read the balance of section 2.1 (“Objectives”), you see that that most of the remainder of the paragraph deals with the goal of tax avoidance, with 195 words in the paragraph dedicated to this issue. When KKR claims the limited partnership agreement is a trade secret, it’s not hard to surmise that these tax games are a big part of what they are really trying to hide. But now that we can look across a series of limited partnership agreements, it’s clear that the tax strategies are highly parallel across funds. To the extent that there is anything distinctive, it’s in minor details relating to the implementation of the tax scheme, and not its objective or design…

Key person terms are another provision of LPAs that PE firms have asserted rise to trade secret status. The idea behind a “key person” provision is that certain individuals are critical achieving the sought-after investment returns and the investors thus depend on their expertise and experience. The agreements provide that if any of these “key persons” depart or otherwise can no longer work for the private equity firm, the limited partners can stop contributing capital to a fund or even force its dissolution.

Let’s look at Milestone Partners IV, where in section 3.2(h), you can see that both John P. Shoemaker and W. Scott Warren are defined as the sole “key persons”. Are we supposed to be surprised by this? Both Shoemaker and Warren are described on the firm’s website as Milestone’s sole managing partners. So there is nothing really a secret about this either, nor is it easy to see how disclosure of Shoemaker’s and Warren’s key person designation, even if it were previously a secret, would hurt Milestone upon disclosure.

We see more of the same, the absence of any specific or sensitive detail regarding investment strategies in this new round of limited partnership agreements. In fact, you’d expect, just like the “Use of Proceeds” section in a public securities offering, for the investment strategies to be described in the most vague and general terms possible so as to give the general partner maximum flexibility in executing his mandate. And that’s what you see again and again. For instance, from Oak Hill Capital Partners III:

Purpose. The Partnership is organized for the purposes described in the Confidential Private Placement Memorandum of the Partnership, including: making investments; owning, managing, supervising and disposing of such investments; sharing the profits and losses therefrom and engaging in activities incidental or ancillary thereto; and engaging in any other lawful acts or activities consistent with the foregoing for which limited partnerships may be organized under the Partnership Law. The purposes of the Partnership may be carried out through activities conducted by the Partnership or through investments in corporations or any other Person, or participation therein, organized and conducted in the United States or elsewhere.

And this is the language from Blackstone V:

Purpose. Subject to the express limitations set forth herein, the principal purpose of the Partnership is to seek out opportunities for investment utilizing the investment skills of the General Partner and the Advisor and that are generally consistent with the purposes and objectives set forth in the Offering Memorandum.

Specific activities permitted are committing capital to acquisitions, dispositions,
restructurings, workouts, management acquisitions, private equity investments and any other
situations deemed appropriate by the Advisor without restriction thereon, except as expressly set forth herein (“Investments“).

Amusingly, the definition of Investments (which is what the underline is meant to signify) refers back to the very same section, 2.4, for the meaning:

“Investment” shall have the meaning specified in paragraph 2.4, and when the
context requires, that portion thereof allocated to BCOM as provided in paragraph 3.9 or
as otherwise set forth in Article Five.

Without going into mind-numbing details, Section 3.9 doesn’t give any secret sauce about how Blackstone might compete in the marketplace (as in find or do deals) but instead the financial arrangements relating the rights Blackstone has in managing this fund related to competing fund of its own, Blackstone Communications I, and other parallel investments. The section is impressively difficult to parse. Article Five is the section on rights and duties of the general partner, with a strong emphasis on rights.

Similarly, Blackstone names only Steve Schwartzman and Hamilton James as key men; it also states that if a majority of the other unnamed Senior Managing Directors as of the closing date become incapacitated or “cease to devote the time required by paragraph 5.3.1….” the limited partners must be notified of a Key Man Event. The notion that Steve Schwartzman and Hamilton James are important to Blackstone hardly constitutes a state secret, and the document avoided naming any of the other Senior Managing Directors.

In fact, as we’ve stressed, what the industry does not want to see is other critical provisions of these documents, which we and the media have only started to dig into. Those include the extensive and often impenetrable tax provisions, the egregious indemnification agreements, the waiver of fiduciary duty, weak oversight provisions for limited partners, and lack of adequate disclosure of performance and all expenses and fees paid to general partners by portfolio companies.

There’s good reason for the general partners to want to keep these contracts secret. They don’t reflect well on them or on their captured investors.

Update 9:00 AM: An alert reader e-mailed us with more confirmation of how absurd it is for private equity funds to claim that their limited partnership agreements contain competitively valuable information. This section from a 2011 paper by Peter Morris and Ludovic Philappou of Said Business School refers to another type of information that private equity firms insist much remain secret, namely portfolio company financial results. However the same logic applies to the issues we raised:

A second objection [by GPs to improved disclosure] might be competitive disadvantage. Private equity firms might suggest that this kind of disclosure would involve giving away valuable trade secrets. This is disingenuous: it misrepresents what private equity does,
and the nature of the information involved.

Success in private equity does not depend on a simple, repeatable formula, like the recipe for Coca Cola. [emphasis added] Private equity firms try to run companies better by improving their governance. Governance involves qualitative issues like organisational structure, hiring decisions, leadership and internal incentives. Historic financial reports reveal nothing significant about what those decisions were or how they were implemented; all they reveal is the financial outcome. It follows that when a private equity firm discloses historic financial results of an individual portfolio company or a fund as a whole, in the way we suggest, it runs no risk of disclosing any proprietary trade secrets. We fail to see how reporting the information we propose creates any real competitive disadvantage. Buyouts which file public quarterly reports with the SEC or elsewhere do not seem to have suffered as a result.

Print Friendly, PDF & Email


  1. proximity1

    Agreed. The more I read about it, the more I’m convinced that PE is the most important area in current financial misbehavior–the rock under which all the creepy-crawlies scurried after the sub-prime scandal’s rock was upturned and light flooded in upon them. For anyone who wonders why private wealth spends such obscene amounts to capture and control the electoral and administrative politics around the developed world, you need only understand the hardly-to-be-believed riches being reaped as a consequence of negligent official supervision of the world of private equity. It’s there, among other places, where wealth’s investments in corrupting public administrations pay off so handsomely.

    I finally had a chance recently to read the New York Review of Books article by Robert Kuttner “Why Work is More and More Debased,” in which he features commentary on The Fissured Workplace: Why Work Became So Bad For So Many and What Can Be Done to Improve It by David Weil and Private Equity at Work: When Wall Street Manages Main Street by Eileen Appelbaum and Rosemary Batt.
    (See these links: http://www.nakedcapitalism.com/2014/10/private-equity-at-work-rigorously-debunks-industry-mythology.html



    Taken together, the two accounts help vividly illustrate for a non-expert reader how capital finance has shifted in its focus and terms of reference with disastrous consequences for the workings of the world of ordinary wage-earning workers and the economies on which they depend for their livlihoods.

    This is a story which deserves everyone’s attention and I urge anyone who has been putting off taking it up to do begin soon. A good place to start is to follow the articles posted by Yves under the subject tag : http://www.nakedcapitalism.com/category/private-equity

  2. pdooley


    “refers to another type of information that private equity firms insist much remain portfolio company financial results”


  3. flora

    Many thanks for your PE reporting, Yves.

    “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”
    -Supreme Court Justice Brandeis

  4. scraping_by

    One thing notable in the Objectives paragraph is that the money gathered is intended, without commitment, to merger and acquisition activity.

    There may be someone dwelling under a rock who hasn’t figured out M & A is a disaster for ongoing companies. There can be some argument about the exact percentage of loss, but the record shows the resulting enterprise is crippled and takes years to recover. Even without the loot ‘n scoot piracy publicly laid out when Romney ran for president, the synergy promised never shows up in performance.

    Governments depend on the real economy for funding. The public assets it creates or holds are the basis of economic activity, directly or indirectly. So a reduced viability of the real economy means a reduced funding basis for government. And for the public employees who take deferred compensation from the pension funds.

    So public pensions funds are funding M&A, diminishing their own future. Along with ethical investing, they should learn some long-term investing.

  5. susan the other

    PE is making money on both ends. It prevents LPs from understanding the business model by baffling them with bullshit and bribing them with tax deductions. It hollows out all the value of any businesses it “reorganizes” and sells off, new massive debt burdens and all. So naturally PE wants to make it look like a few special geniuses, “key people” are responsible for the decisions so that when the SHTF they can all say, like Greenspan, “I found an error in my model.” Right Alan. PE will protect this turf until a financial dust bowl blows it all away. Because why not? And it just might be that these PE scams will be lapped by the corruption in the financial system and become a footnote in the ruins.

  6. Timmy

    Sometimes what is interesting in the agreements is what is missing. Section 3.9 of Blackstone V struck me this way. It basically says that anything that meets the definition of an eligible investment for Blackstone V might also be eligible for another BStone fund and there are rules to govern the allocation among the funds. What is unsaid here is that there are significant degrees of freedom in the definition of an eligible investment before it ever hits the PE queue. Something that “just misses” the PE eligibility criteria could be a great opportunity for investment in prop trading, hedge funds or mutual funds settings (yes, played differently for different stakes on different horizons), all of which sit under the BStone umbrella and all of which have different fee, liquidity and performance structures with different rewards to the firm. If I was an LP, I’d want to know that my fund sits near the top of BStone’s investment filter, not the bottom. From these documents I don’t think you get any assurances you aren’t in competition with the firm for the best investments.

  7. cnchal

    Public pension funds, which are government bodies, are the biggest single group of investors in private equity

    No irony. Where else can government employee pension funds go to attempt to achieve an 8% return when government bonds are at a fraction of that? The stawk market?

    That’s where the special people come in. The wizards of PE promise to help the government employee pension funds make extra money. Turns out the wizards were liars. Finance people. Who knew?

    I appreciate these posts. Yves’ light is a blowtorch. I can already sense that billions in future loot for the PE wizards has vanished.

Comments are closed.