Private equity firms need greater fund transparency and disclosure requirements, among other measures, to better align the interests of GPs and LPs throughout the life-cycle of a fund, warned a report released by the International Organization of Securities Commissions. The IOSCO report follows a similar 2008 study by the group which pinpointed conflicts of interest as one of the biggest risks in the private equity business model.
For example, GPs may work against investor interests by raising increasingly larger funds, regardless of deal opportunity, to maintain a firm's market position; or by giving some limited partners preferential treatment in co-investment opportunities to generate management fees, the report noted.
GPs typically attempt to mitigate such conflicts of interest through contract negotiations with investors, information reporting requirements, investor advisory committees and the adoption of performance related remuneration, the report said, but efforts to align GP and LP interests can be further reinforced through eight guiding principles.
The principles urged private equity houses to periodically review policies and procedures put in place to mitigate conflicts of interest, treat limited partners on a more equal basis, offer greater consultation with investor advisory boards and to delegate certain tasks to independent third parties, among other measures.
With over 100 participating nations, members of IOSCO regulate approximately 95 percent of the world's securities markets.