LPs are increasingly asking for more detailed information on what costs are paid for by the fund and questioning fund managers on whether particular costs should actually be charged to the management company.
Proskauer identified this trend in its latest research report, which compared limited partner agreement (LPA) terms of 30 funds raised in the last 18 months to the LPA terms in prior funds.
LPs are seeking more disclosure on costs that have typically been charged to the fund, such as regulatory reporting and insurance costs.
In recent years, the private equity sector has found itself under a growing regulatory spotlight, which has impacted the cost of compliance for both private equity firms and the funds that they manage.
“Insurance costs were historically paid for by the fund but now investors are asking for more of a breakdown (for example who pays for key man insurance, directors and officers insurance, and professional indemnity cover),” Eamon Devlin, managing partner at MJ Hudson told Private Equity International's sister title pfm. “Other contentious cost items include depositary and regulatory costs incurred in connection with a fund and generally complying with the Alternative Investment Fund Managers Directive (AIFMD).”
One of the costs incurred by the fund under AIFMD is the requirement for EU Alternative Investment Fund Managers (AIFMs) to appoint a single depositary for each Alternative Investment Fund (AIF) they manage.
Fees paid by the fund to set up a depository can be costly and funds incur costs based on both basis points and fees. In particular, AIFs with less than $200 million of net assets are more likely to be within scope of a minimum fee and face a higher basis point charge.
In order to ensure compliance with AIFMD, fund managers must also employ the services of an external valuer and enter into professional indemnity insurance. Alongside regulatory fees, fund managers must pay fees at both the start of the application for the license, and on a periodic basis for their portfolio management, risk management and administrative activities.
According to the Proskauer data, which lists 28 of the funds involved in the research as private equity funds with a European focus, both FATCA and AIMFD compliance costs specific to the fund are currently allocated to the fund. However, LPs have increasing concerns about AIFMD compliance costs not directly related to the fund, as well as costs related to filing requirements for the US Securities and Exchange Commission (SEC), such as Form ADVs.
Under new SEC requirements, European private equity fund managers raising capital in the US are required to provide the SEC with regular information and data about their fund and its activities set out in Form ADVs, which has resulted in further costs.
In addition to clarity around regulatory costs, investors are increasingly asking more details on the motive behind fund managers marketing costs. These include the issues that could occur if a fund manager attends a conference paid for by the fund under the pretense of sourcing investments, but then uses his or her time to market to new investors for the firm’s next fund.
LPs asking for more clarity on fund costs looks set to be a continuing trend and according to Edward Lee, associate at Proskauer, GPs should be prepared for increased scrutiny.