In 10 years’ time there will be no single piece of information an LP cannot access about a manager it invests with and a fund it commits to. There will be a completely clear channel between LPs and GPs through which information will flow freely back and forth. If a manager is not willing to open itself up to this degree, there’s a high chance investors will take their capital elsewhere.
Transparency and disclosure between GPs and the limited partners that commit to their funds is an area of top priority for investors and regulators alike. Industry insiders agree progress has been made over the last few years, but there’s still work to be done to address the perceived “double standard” between private equity and other forms of investing, says TorreyCove’s president and chief executive David Fann.
“All other forms of investment have high degrees of transparency, except for hedge funds and private equity,” he says.
“If you invest in a mutual fund or an ETF, fee disclosure is extremely explicit; you know what you’re paying in management fees, you know all the performance fees and under what circumstances they’ll be paid. Right now in private equity there are certain managers that are still a bit opaque.”
Fann notes it can often be in the GP’s best interest to maintain some opaqueness, and a segment of private equity and hedge fund managers like to operate in secrecy. However, the trend towards greater transparency is only moving in one direction, and it’s likely the LP of the future will have much greater access to information than is available today.
In an April letter to the Securities and Exchange Commission, the Institutional Limited Partners Association called on the regulator to update its rules around marketing and fee disclosure and to enhance other reporting and disclosure requirements in the name of investor protection.
“Private equity is institutionalising to a point now where it’s a multi-trillion-dollar industry, and investors have plenty of choices in the marketplace,” Fann says. “They are going to continue to expect greater transparency from those that they’ve invested with.”
And LPs won’t be getting off lightly either; they are likely to face increasing calls for greater transparency too. California law AB-2833, which was enacted in 2016, requires all California-based public pensions to disclose private equity-related fees and expenses. It’s likely other states will follow suit, with Kentucky, New Jersey, Washington and Illinois all discussing similar rules.