Friday Letter: A template for change

ILPA’s Fee Transparency Initiative is to be lauded, but without the weight of a regulator will GPs bend to LPs’ requests?

There’s nothing not to like about a Fee Transparency Initiative and the announcement from the Institutional Limited Partners Association (ILPA) of such a scheme is a welcome addition to the GP reporting and disclosure debate.

The industry association is drafting a fee reporting template slated for launch next January. Not only its members, but the broader industry including GPs and advisers will be consulted on its format. The wide range of views sought should garner some buy-in for the outcome, which seeks to standardise a necessary process that many GPs and LPs view as a burden.

Buried in the middle of the release is a note about ILPA making additional recommendations on the role of third parties, including administrators, auditors, consultants and lawyers, to ensure compliance with fund documentation.

This is not, as some thought, a reference to the contentious and often unexpected inclusion of operating, auditing and other miscellaneous fees that nickel and dime an LP, but a reference to the cost and expense LPs must incur to audit and validate the fees they are charged. This usually requires hiring a consultant, itself a sometimes lengthy procedure.

As Private Equity International reported, the Los Angeles Fire & Police Pension System hired the services of RVK to validate its management fees following an audit recommendation made in 2012. The consultant delivered its report this month.

RVK gave the fund the all clear. There was no discrepancy between fees charged and communicated. But its report did not examine carried interest and the fund’s audit committee followed up with its own recommendation that “enhancements” to PE expenses reporting, including verifying carried interest, could be made.

Validating fees is a specialised and complex job. And it points to the heart of the fee transparency debate. Even the biggest LPs typically lack the resources and therefore the desire to spend huge amounts of time recalculating what they’ve paid. CalPERS’ admission in April that it couldn’t track incentive fees would attest to this.

Investors understandably want simplicity and clarity. Standardised reporting that facilitates information gathering and benchmarking is a welcome step toward that ideal. But, as LPs know, managers can be resistant.

A number of weighty LPs contributed to ILPA draft template discussions, including CalPERS. Even with a template in hand, would they be able to apply the necessary pressure on a manager with a stellar track record and generating healthy returns to conform to their reporting requirements?

This would require an LP to have the confidence to walk away if a GP wouldn’t fill in the paperwork. This is hard to imagine. As the video of CalPERS investment committee meeting revealed this week, even the biggest and oldest investors in the asset class can exhibit astonishing naivety about the basics on fees. It is not a strong position to argue from.

The template can’t force GPs to comply and ILPA has no enforcement powers over its members to use one. It isn’t mandatory, but only a suggestion and one which LPs can tweak and adapt to their needs.

ILPA can do its best but in the end, unless the regulator weighs in to enforce standardised reporting, it will still be left up to LPs and GPs to negotiate between themselves on how information is disclosed.

That is the situation the group of 13 US treasurers who have written to the SEC to demand more stringent reporting rules are keen to move on from. They are still awaiting a reply.