PEGCC challenges carry definition in ILPA template

Conscious of the tax implications involved, the industry trade body took issue with carry designated as compensation in the ILPA fee reporting template, among other issues. 

In a comment letter to the Institutional Limited Partners Association (ILPA) regarding its new proposed fee reporting template, the Private Equity Growth Capital Council (PEGCC) challenged the template’s description of carried interest as “incentive compensation”. It argued that the current language misrepresents carry as a fee rather than the contractually-agreed-upon sharing of profits.

ILPA released a draft of its fee reporting template in October seeking to standardise the way GPs share fee information with investors. The document itemises a wide range of costs including advisory fees, broken deal expenses, director fees, monitoring fees, organizational costs, placement fees and capital market fees.

Although the template is not yet finalised, the PEGCC revealed that “a number of LPs have already sent the template to certain [PEGCC] members to be ‘filled in’” and at least one LP has already modified the proposed template and sent it to GPs to be completed, according to the letter.

While the PEGCC voiced support for standardised fee reporting, the lobbying group also expressed concerns that those LPs which request modified versions of the template, or request the template in addition to their own reporting requirements, will only “increase the burdens on GPs and fund operating expenses without providing more transparency or relevant information to LPs.”

The PEGCC letter also detailed GP apprehension regarding the way certain items, like fees charged to portfolio companies and expenses reimbursed by portfolio companies, should be reported on an LP-by-LP basis, which is not entirely clear in the reporting template. The letter additionally proposes that the reporting template only be required on an annual basis and removing the trailing 12-month calculation for fee reporting.

The concerns expressed in the letter emphasise the current uncertainty in the industry regarding the standardisation of fee reporting. It remains to be seen what level of acceptance the template will find in the GP community, but the PEGCC letter implies that modifications are needed in order to encourage broad adoption.

In conversations with Private Equity International's sister title pfm, CFOs have aired concerns over the template’s ability to define terms in a way that ensures reporting consistency across funds. Others have raised questions about how LPs will use the data, which fund managers fear will lead to backlash if used out of context. The comments in the PEGCC letter, along with other comments send to ILPA by the 11 December deadline, will be used to further refine the template. 

ILPA plans to publish a final version by 29 January 2016.