In search of the holy grail

It’s easy to sympathise with limited partners. Their portfolios generally include dozens, possibly hundreds of funds, each of which has its own reporting style, format and level of detail. When you start to think about the various underlying assets on which each fund must report, the task of monitoring an entire private equity portfolio seems increasingly daunting – particularly given that LPs typically have fewer than five professionals dedicated to this task.

But it’s not easy for fund managers, either. “The issue is that when you look at some of the requests, you can’t be blamed for being a little bit suspicious [about] whether you’re actually being asked to fill in the blanks and do the calculations for your LPs [in order] to satisfy their own internal reporting requirement,” griped Leonard Wei, chief operating officer at ARCH Capital Management, at PEI’s CFOs & COOs Forum Asia in Hong Kong at the end of last year.

Wei talked about one occasion when he combed through a 75-item checklist from an investor – and found that answers to 42 of the 75 questions could easily have been determined by looking at four slides from the firm’s quarterly LP report.

But despite the headaches around LP requests, any GP worth their salt knows effective communication skills are a big plus with investors. Many LPs even say they would happily sacrifice a few extra basis points of return for a GP who hits the right marks around the timeliness and quality of their reporting, for example. As such, fund managers are updating their reporting methods and communication approaches to help them meet LPs’ varied requests.
So what do we conclude from all this? That this is an industry in desperate need of some standardisation in the reporting process. LPs argue that some level of uniformity would facilitate their digestion of data. GPs, on the other hand, hope that standardisation will result in fewer ad-hoc information requests, freeing up their time (and resources) for other tasks.


However, identifying the problem is only the first step towards reaching a solution. In various interviews with Private Equity International, industry sources have stressed the complexity – perhaps even the impossibility – of crafting a universal reporting format that will please everyone.

Of course, the biggest issue is that the industry encompasses a huge diversity of fund structures and investment strategies, points out Ian Harris, chief operating officer of SL Capital Partners. For instance, venture capital funds make smaller investments and hold portfolio companies with less reliable growth projections. So deciding what company information should be included in a venture capital quarterly report will almost certainly differ from the data typically highlighted in a standard buyout fund template – which would presumably have more to say on portfolio companies’ current and projected revenues, operations, margins, EBITDA and other such metrics.

There’s also very little consensus about what a standard fund report should look like. The most significant attempt to address this problem to date has come from the Institutional Limited Partners Association, whose recently-released reporting guidelines aim to introduce some standardisation in capital call notices, quarterly reports, and distribution notices. But some GPs have already criticised ILPA’s templates for being too time-consuming, and argued that they would burden investors with an information overload.

A different set of reporting guidelines will be released in the coming months by the International Private Equity and Venture Capital Valuation board (IPEV) with these concerns in mind, according to William Hupp, chief financial officer of Adams Street Partners, and an IPEV board member. “In our approach we have tried to determine what the essential disclosures are for GPs to meet the principle of transparency and provide LPs the core information they need as investors,” said Hupp. “This will make determining compliance [with the guidelines] easier.”

However, the ILPA guidelines show the challenge IPEV will face in appeasing stakeholders. ILPA’s capital call notices highlight some of the key criticisms, says one US-based private equity chief financial officer (who was speaking on the condition of anonymity). The template offered does little to distinguish itself from a distribution notice, an entirely independent event, he suggests. Cross-sharing information between the two (as a matter of disclosure) can add unnecessary data, potentially confusing LPs. ILPA’s sample capital call notice letter, which requests historical information on both events, adds noise to what should be a relatively straightforward release, he argues.

“Why not save the historical data and more detailed information strictly for quarterly reports?” he asks. “Or, for those LPs who need certain detailed information before then, supplement a report with the requested information on a more ad-hoc basis?”

The presentation of information is another area that’s frustrating attempts to ensure a wider adoption of ILPA standards. Using the same capital call sample letter, a number of numerical data points are scattered across the notice in paragraph form (see box-out). “It seems like LPs could get lost in the language and would likely benefit from a table or graph detailing the core data around the capital call,” says the chief financial officer.

Perhaps ILPA’s greatest challenge has been in striking the right balance in its guidelines between uniformity in reporting and a degree of flexibility. Flexibility allows GPs to tailor their reports based on investor needs and specific fund characteristics. But the risk of too much flexibility – as openly voiced by some private equity chief financial officers – is that ILPA’s reporting standards can in turn become too subjective, making compliance with any standard model unclear.

In his recent interview with PEI (see Privately Speaking, p. 28), Joe Dear, chief investment officer of The California Public Employees’ Retirement System, praised ILPA’s efforts – or at least the revised version thereof. “I think the message was heard that they are not intended to be one-size-fits-all – and to be compliant with the guidelines didn’t mean that they have to be absolute letter-of-the-law in complying with every single thing.”

Added Dear: “This institutionalisation of the asset class through templates and other standardisations should make it easier for everybody in terms of information gathering, responding to requests, processing capital calls and distributions [and so on]. That’s not very exciting, but from a day to day investment management standpoint, these are important advances. And I don’t think they would happen without a body like ILPA to be a convener.”


It’s likely that many GPs could reduce both their and LPs reporting woes by updating (or tweaking) their current reporting methods. As mentioned above, some GPs complain LPs do not read quarterly and annual reports thoroughly (instead preferring to get a GP or investor relations person on the phone to discuss figures).

It could be argued that this is as much the fault of the GP as the LP, says Courtney McCarthy, chief investor relations officer at Summit Partners. Financial reports, which can range anywhere from 15 to 50 pages depending on the size of the portfolio, “require a level of detail that can make it hard to digest for an LP who is pressed for time”.

A further complication is the difference in format from one report to another. Some GPs lead their reports with a business overview, others with a market commentary; others perhaps with a breakdown of recent realisations or investments, says McCarthy.

“Many GPs do not consider their options when crafting the layout of the report. They miss the chance to make it a more useful and enjoyable reading experience for LPs, and in so doing they miss an opportunity to reinforce key elements of their strategy by helping the LP draw compelling conclusions”.

McCarthy says a better approach would be for GPs to utilise summary sections and “stick to it… Thus, after a few cycles, everyone understands what goes where. The writers will thank you, too, as they do not have to consider reinventing the wheel each reporting period”.

The standardisation of reporting still seems a distant goal. But it’s easy to see how a simpler approach would be a better way to build good relations with LPs.