On Jan. 29, 2016, the Institutional Limited Partners Association ("ILPA"), the global organization representing private equity fund limited partners ("LPs"), released a new fee reporting template and guidance document outlining recommended reporting practices related 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 template details all income a GP has collected from LPs and portfolio companies — including fees, fund expenses, applied offsets, carried interest, and income from a fund's related parties or vehicles — and seeks to supplement a fund's standard financial disclosure. Its purpose is to provide a clear and uniform reporting method for use within the private equity industry.
ILPA released a draft of the fee reporting template in October 2015 as part of an initiative it launched in May 2015 to increase transparency between LPs and GPs surrounding fees and expenses. It subsequently accepted feedback from interested parties on the proposal in an attempt to instigate a collaborative dialogue between GPs and LPs to identify a standard method of fee reporting that would be acceptable to all parties.
The final template requires GPs to disclose specific fees received from their portfolio companies in a clear and regular manner, as well as to report how much of those fees they have passed on to investors via reduced management fees. While the original template outlined a requirement for reporting fees on a trailing-12- months basis, the consultation process revealed that GPs preferred a year-to-date reporting format, and the template was modified to conform to this request.
The final product was shaped by feedback from nearly 50 LP and 25 GP organizations, as well as numerous fund administrators, consultants and service providers. ILPA indicates it has been endorsed by prominent LPs, including several public pension plans, while private equity giants Carlyle and TPG have indicated their support as GPs.
In addition to the template, the industry group released guidance regarding its implementation. ILPA expects GPs that choose to use the template to take up to a year to do so. The template is only intended to be applied on a prospective basis to future funds and "where feasible" to reporting on current vintages. ILPA advises against requiring GPs to "retroactively report the full breadth of the information within the template for older funds."
Moreover, since the majority of the fees charged to portfolio investments are tracked in a separate ledger from the fund's accounts, ILPA says implementation of the template "will likely require meaningful revisions to GP reporting procedures, and ultimately entailing a manual process, to aggregate information from multiple ledgers into a single report."
ILPA's efforts are part of an overall emphasis within the private equity industry aimed at increasing the level of transparency private equity fund managers offer their investors. Fee and expense practices have faced increased scrutiny since May 2014, when the SEC's Office of Compliance Inspections and Examinations identified high rates of fee- and expense-related violations in investment adviser examinations. More recently, public pension funds — including the California Public Employees' Retirement System and the New York City Retirement Systems — have advocated for better reporting practices from the private equity fund managers with which they invest.
In the future, ILPA states that it would be in the best interests of the industry to explore how to automate the generation, presentation and dissemination of the data contained within the template. A version of the template will be available on the ILPA website in a software-agnostic, XML format to facilitate integration into LPs' and GPs' existing back-end reporting systems.
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