Almost a year on from the launch of its private equity reporting template on fees, expenses and carried interest, the Washington-based Institutional Limited Partners Association (ILPA) reports “significant progress” in the template’s adoption.
The $178.6 billion New York State Common Retirement Fund (NYSCRF) has made fee disclosure via the template a condition of investment in all new private equity funds.
“We require the managers of all new commitments to use the ILPA template,” said a spokesperson for the fund, which has 7.8 per cent of assets in private equity.
“Over half of our managers are either using the ILPA template or are working to use the ILPA template.”
However, he says managers with older funds tend not to report in the ILPA format, although the Common Retirement Fund is “working with these managers to improve their reporting standards.”
ILPA’s template requires GPs flag carry fees but also capture expenses and the incentive allocation paid to managers and their affiliates.
This means investors can compare fund performance going back to inception, plus a whole range of advisory, placement and deal fees.
The idea is this data will support LPs’ internal allocation decisions, help steer their manager selection processes and will feed up into top line organisational assessments of value across the portfolio. It is the kind of transparency investors hope will help them to both negotiate better deals and level the playing field which currently lets the biggest LPs, with the best relationships, also get the best deals.
Head of private equity at the UK’s USS, Geoffrey Geiger, says the template, or equivalent disclosure, is now a condition of investment.
“We support a voluntary approach to adopting the template, the PE industry came up with its own solution to concerns around transparency on fees and we think it works well. It is in the GPs’ and LPs’ mutual interest to use the template, and as more GPs develop the systems to comply with the template and LPs become accustomed to receiving the data, it will just become part of the process.”
“The template, or equivalent disclosure, is now a condition of investment; as we negotiate with our GPs we are using the template with GPs. We find that we get high levels of disclosure as a result, and more than what has been reported on in the industry.”
A number of leading general partners (GPs) have now also publicly backed the initiative, as well as a large and growing number of limited partners (LPs) and service providers, says the organisation that represents some 300 institutional investors in private equity.
“As the initiative builds a real head of steam with support from all corners of the asset class, we are on the cusp of meaningful change that is in the long-term best interests of all industry participants,” says Peter Freire, ILPA CEO.
The aim of the fee template is to establish more robust and consistent standards for fee and expense reporting and compliance disclosures among investors, fund managers and their advisers. The template is the industry’s own response to growing criticism of private equity fees from regulators, trustees and beneficiaries, with private equity increasingly perceived as a grey area that allows managers to charge investors and pension funds hidden and backdoor fees.
“The evidence suggests that template adoption is gaining momentum. More GPs are officially endorsing the template and even more are providing the template data unofficially by making it available to LPs that request it. On top of the GPs already offering – or gearing up to offer – the template, we have more than 100 LPs asking for it, and in many cases making it a condition of doing business,” Friere says. “This building momentum around adopting the template makes complete sense: notwithstanding near-term (and very real) implementation costs, the long-term benefits of a single, industry-wide standard for all – GPs and LPs – are self-evident.”
Private equity has always been one of the most expensive asset classes for investors. It remains to be seen whether the greater fee transparency will translate into an ability among LPs to put pressure on fees.
“It is too early to tell,” said the NYSCRF spokesman.
ILPA’s Freire agrees: “It’s too early to tell how the template’s adoption will impact what the market will bear in terms of fees. To the extent that greater transparency helps LPs in negotiating fair and reasonable fees, any such impact would likely not be apparent until late 2017 at the earliest, when detailed reporting for recent vintages becomes more widely available and the ILPA template becomes a more widespread feature in newly negotiated LPAs.”
A two-year transition
Due to the long-term nature of private equity funds, and the complexity surrounding the technology required to automate the production of this data, a full transition to using the template is expected to take up to two years.
Several of the endorsing GPs expect to begin producing the template data for LPs, requesting it as early as the first half of 2017, says ILPA.
Despite progress, some funds report slow progress when it comes to persuading GPs to use the template and simplify their fee structure.
“Things are improving but it is a slow process. Some of our managers have been very constructive, but not all. A common response from managers is that they don’t see other LPs asking for it, even though we find that hard to believe. I think it’s likely that we would make filling out the template a condition of future PE commitments,” says James Duberly, director, pensions investments at the UK’s £12.5 billion ($18.8 billion) BBC Pension Trust with a 5 per cent allocation to private equity.
So far 33 LP organisations have publicly endorsed the template.
The latest prominent GPs to publicly back it include Advent International, Apollo, Blackstone, CCMP, Hellman & Friedman, KKR and Silver Lake. They join The Carlyle Group and TPG.