Shay6web by Shay Caufield, PEF Services LLC

There has been substantial attention devoted to private equity fund managers and their lack of adequate transparency when it comes to periodic reporting to their investors.  We have seen headlines involving large institutional investors being questioned by their investment boards to provide details on expenses and profit sharing agreements only to uncover that these investors haven’t been tracking them at all and may not even have a solid handle on all aspects of the asset class. 

The fund managers may be to blame for not providing more detail, but it is important to note that these entities have had no regulatory reporting requirements,  and the limited partners haven’t forced the issue.  Of course, there have been more sophisticated limited partners that have demanded more information, but in some instances, this is not provided equally to all limited partners and is supplemental to a fund’s normal reporting process.  

The ILPA reporting guidelines were first issued in 2011, but they have been selectively and slowly adopted since required reporting is dictated more by investors, not an industry standard that is a one-size fits all. Historically, investors have selected portions of the guidelines they feel are valuable.   After reviewing the most recent template released in conjunction with ILPA’s Fee Transparency Initiative on January 29, 2016, it is clear that ILPA succumbed to the “more is better” concept.  The template may be viewed as a cumbersome request with too much granularity, but there are some worthy inclusions that will assist investors in understanding some large fees and profit sharing agreements.  Management fees appear to be a simple calculation when reviewing a limited partnership agreement, but they typically can’t be recalculated without knowing the impact of offsets, waivers, and rebates which are included in the template.  The incentive allocation, which is often buried in unrealized gains and distributions for the purpose of investor reporting and disclosed in the financial statements at the fund level, is arguably the most difficult amount to verify and track.  The new fee template provides a clear roll forward of accrued incentive allocation at the beginning of the period with detailed adjustments for incentive allocation paid during the period and change in accrued incentive allocation for the period to arrive at the ending balance. 

Whether the full ILPA best practices templates or some modified version is adopted, it is clear that there will be significant increases to the information investors expect and demand in their periodic reporting.  Fund managers will have a greater need to use fund administrators with sophisticated systems, processes and resources to produce this level of reporting.  Limited partners should also consider tapping into fund administrators to access their sophisticated systems, processes and private equity expertise that are required to compile and analyze this information.  

The ability to capture, report and analyze information can be a differential for both general partners and limited partners in an increasingly competitive and scrutinized asset class. Help should be welcomed. Click here to view the new ILPA Fee Reporting Template.