Overview
On May 13, 2026, the Institutional Limited Partners Association (ILPA) published guidance regarding organizational expense management and alignment considerations between limited partners (LPs) and general partners (GPs). ILPA’s The Alignment Gap: Rethinking Costs in Private Equity Fund Formation addresses existing market practices in which LPs typically bear organizational costs, while GPs retain discretion over the related processes and service providers.
Background
Organizational expenses – legal, administrative, and compliance costs incurred during fund formation, have historically been borne by LPs. This allocation has been a longstanding feature of private equity fund structures. ILPA’s guidance cites analysis of private funds indicating that median organizational expense caps increased from roughly 20 basis points in 2019–2021 to approximately 25 basis points by 2024–2025. Meanwhile, private equity has grown into a nearly $10 trillion global asset class, and many of the GPs raising large flagship funds today are among the largest financial platforms in the world.
ILPA contends that the increase in organizational expenses is the result of a simple misalignment: GPs select fund counsel (often the same firm representing the GP itself), set the organizational expense budget, and direct the fund formation process while LPs bear the cost and may have limited visibility into certain aspects of cost determination and service provider selection.
The ILPA Framework: Three Proposed Elements
ILPA’s guidance proposes a three-part framework that institutional investors should be aware of:
- Cap Organizational Expenses at the Lower of 5 Basis Points or $10 Million
ILPA recommends that LP-borne organizational expenses be capped at the lower of 5 basis points of a fund’s target AUM or $10 million in total. The guidance makes clear that side letter negotiations and the MFN process should be explicitly captured within the cap.
For most small and mid-sized funds, this cap should present no meaningful disruption. For large flagship funds managed by established GPs with standardized documentation and long-term investor relationships, the guidance appropriately questions why formation costs should continue to escalate at all.
- A 50-50 Cost-Sharing Framework for Expenses Above the Cap
Where formation costs genuinely exceed the proposed cap, ILPA recommends that GPs bear 50% of the overage, with LPs bearing the remaining half. ILPA contends that this approach does not disadvantage new and emerging managers while maintaining a meaningful economic incentive for better-established GPs to manage the process efficiently.
- Legal Fee Transparency and Budget Discipline
ILPA calls for fund counsel to provide LPs with rate schedules and draft budgets for all formation-related services which as a general matter could be communicated freely, given that institutional investors are already bound by confidentiality agreements. The guidance also recommends that for funds targeting more than $1 billion in AUM, GPs conduct competitive bidding processes when selecting fund counsel to facilitate comparison of service providers and costs.
What This Means for Institutional Investors
ILPA guidance is advisory, but historically ILPA guidance has shaped industry norms and informed LP due diligence and negotiation practice across the market. Institutional investors should consider implementing the following near-term steps:
Reference the framework in negotiations. LPs may reference the framework when discussing organizational expense budgets, requesting legal fee transparency, or seeking cost-sharing provisions in limited partnership agreements.
Scrutinize MFN and side letter cost treatment. The recent trend of carving the MFN election process and, to a lesser extent, side letter negotiations, out of organizational expense caps and treating them as uncapped partnership expenses is addressed in the guidance. LPs may evaluate whether, and ensure, LPAs reflect the ILPA position that these types of expenses are squarely within the universe of organizational expenses.
Request legal rate schedules and budgets upfront. The guidance encourages disclosure of such information. Investors should make these requests a routine part of the subscription and diligence process.
Flag competitive counsel selection for larger funds. For commitments to funds targeting over $1 billion, LPs may wish to inquire whether a competitive RFP process was conducted for fund counsel — and note its absence where relevant.
Engage your legal counsel on LPA language. As this guidance gains traction, we expect to see increased negotiation around organizational expense cap provisions, cost-sharing mechanics, and transparency requirements. Institutional investors should ensure that any new commitments — and side letter requests — address these issues explicitly.
Looking Ahead
Private equity negotiations can be contentious, with institutional capital allocators managing the tension between access to top tier managers vs. fee drags that could impact returns. ILPA’s guidance reflects evolving market perspectives on organizational expenses and may inform future negotiations between GPs and LPs. Institutional investors that engage proactively with these issues now will be better positioned to protect their interests across future fund cycles.
Not all negotiations can be treated identically, and ILPA’s guidance should be tempered by other bargaining dynamics such as fund size, commitment amount, platform maturity, etc.
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