The Institutional Limited Partners Association ("ILPA"), a global organization representing private equity fund limited partners ("LPs"), released a draft template setting forth recommended reporting practices with respect to the disclosure by private equity fund managers ("GPs") of the fees and expenses borne by the private equity funds managed by the GPs. The proposal is the first product of ILPA's Fee Transparency Initiative, a broad-based effort involving senior investment and reporting professionals from a cross section of investor institutions and advisers that seeks to establish stronger and more consistent standards for fee and expense reporting and compliance disclosures among investors, fund managers and their advisers.
Feedback on the proposed template is being accepted until Dec. 11, and final guidance is expected to be published by Jan. 29, 2016, along with broader recommendations on fee reporting and compliance disclosure best practices. The consultation period is an opportunity for GPs and LPs alike to get involved in a collaborative dialogue regarding disclosure and transparency within the private equity fund industry. A greater level of involvement by all affected parties should help ensure a more balanced and practicable outcome, as LPs are likely to use the final product in their discussions with GPs in the future.
As currently written, the proposed template would require GPs to disclose specific fees received from portfolio companies. It would also require fund managers to clearly report how much of those fees they have passed on to investors via reduced management fees. GPs would be obligated to report these figures in three categories: (1) on a quarterly basis, (2) for the trailing 12- month period and (3) since the fund's inception.
The template is part of a larger movement focused on enhancing the level of transparency private equity fund managers offer their investors. Fee and expense practices have been subject to increased scrutiny since May 2014, when Andrew J. Bowden, a director of the SEC's Office of Compliance Inspections and Examinations, indicated that the SEC had identified high rates of fee- and expense-related violations in investment adviser examinations. More recently, public pension funds have called for better reporting practices from the private equity fund managers with which they invest. In August, the California Public Employees' Retirement System said it would require private equity fund managers to disclose the fees they receive from portfolio companies if they want to receive future investments from the $300 billion fund. Subsequently, the New York City Retirement System wrote to 200 investment firms to demand "full transparency" on a range of fees, both on a historical basis and on a quarterly basis going forward. Funds that decline could be cut off from the nation's fourth-largest pension fund.
ILPA has moved the market through some of its previous efforts, most notably through its Private Equity Principles Version 1.0, released in 2009, and the revised Version 2.0, released in 2011. Designed as best-practice documents, they outline "a means to restore and strengthen the basic 'alignment of interests' value proposition in private equity." Both were devised through an extensive consultation process that included both GPs and LPs. The group's call for feedback on its proposed template is the latest step in this process, and it represents another opportunity for discussion between LPs and GPs regarding the terms of private equity fund investments.
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