Friday Letter: Calling in the cavalry

The call by a group of US LPs urging the SEC to clean up GP reporting takes the debate over disclosure practices to a new level.


Some smaller GPs will have already found themselves on the wrong end of the growing trend for pension funds to cull the number of managers they invest in. But they could also find themselves disadvantaged if more onerous levels of reporting and attribution are forced upon them by regulators.

The news that a coalition of 13 US state pensions, overseeing some $1 trillion in assets, had submitted a letter urging the SEC to force GPs to implement a standardised system for reporting fees and expenses would certainly have piqued their interest.

Spurred by the revelation that CalSTRS had admitted it wasn’t able to break out how much carried interest it had paid to GPs over the years, the letter provided a window into how LPs are viewing the transparency issue: many GPs aren’t moving fast enough in providing specific performance data to their investors.

Larger GPs may be relatively relaxed about the prospect of the SEC imposing additional transparency measures upon them. After all, the largest managers have become private equity behemoths; both fundraising and cash-generating machines. Their scale has allowed them to create back office operations which can cope if extra layers of reporting requirements are forced upon them. But for GPs in the middle and lower-middle market keeping abreast of new reporting procedures could put extra pressure on profit margins.

The letter to the SEC – orchestrated by Rhode Island general treasurer Seth Magaziner – took fund managers to task for allegedly burying fund expenses, allocating incentive fees and portfolio-company charges deep in annual financial statements.

Magaziner told Private Equity International: “We would love for the SEC to step in and produce some real structured measures for the type of disclosures GPs provide to LPs on fees and expenses.”

Whether his group of LPs is able to prod the SEC into further action or not, the issue is not going away any time soon. If anything, the clamour for change will only grow louder.

GPs large and small, and LPs themselves, may have little choice in the matter if political and regulatory sentiment goes against them.

At the Pension Bridge Conference in Chicago this week, LPs’ understanding of what GPs could or couldn’t divulge to them came under scrutiny.

David Fann, president and CEO at pension consultancy TorreyCove Capital Partners, told his audience that it was necessary for pensions to band together, galvanise their consultants and improve ILPA reporting standards on capital calls.

“I don’t think LPs understand the full degree of the limited ability to capture data from GPs. Some GPs are better about providing data than others. But the idea of carried interest being part of the LP disclosure is still thus far a rarity,” he said.

Fann said his firm monitors around 800 to 900 funds and probably less than a quarter provided full detailed disclosure on carried interest. Like many others, he believes it is only a matter of time before journalists start submitting Freedom of Information Act requests to obtain information about private equity practices.

GPs and LPs should both take note. In the meantime, it’s all eyes on the SEC to see if they will, or won’t, heed the call from Rhode Island and take action.