Fee transparency: LPs increase pressure on GPs

Given the growing press and regulatory scrutiny of expenses and fees charged by some general partners to their investors, it was perhaps just a matter of time before limited partners started taking the issue of disclosure into their own hands.

That is what happened in July when 13 public pension executives, representing $1 trillion in assets, called on the Securities & Exchange Commission (SEC) to make it mandatory for GPs to disclose fee and expense information quarterly, and make them adhere to one industry reporting standard.

Their letter to the SEC’s chairwoman, Mary Jo White, followed a similar call for greater transparency by David Silber, chief investment officer of the $4.4 billion City of Milwaukee Employees’ Retirement System, who published his own letter about the need for greater transparency and disputed the notion that keeping such information confidential enables financial buyers to gain a competitive edge.

Seth Magaziner, general treasurer of the State of Rhode Island, was among the 13 who signed the SEC letter. He told Private Equity International in July: “We have seen a wide disparity in the reporting of fees and expenses from the private equity funds in which Rhode Island has invested, with no particular trend between smaller and larger funds. This disparity is part of the reason why we are calling for more standardised disclosure.”

It is the way some GPs go about recording fees that has made the process overly complex for institutional investors, according to Magaziner.

“It’s very difficult for LPs to know if the amounts that are being deducted are actually correct. We know the totals of what we’re being charged all in for expenses and carried interest, but for line item reporting it’s up to us,” he said.


The kind of charges that have drawn the group’s ire include fund expenses, allocated incentive fees and portfolio-company charges, which the pension official said can take an LP with a small staff weeks to decipher.

These sorts of fees, the treasurers say, are typically buried in annual financial reports, leaving only annual management fees as the one expense that’s billed directly to investors. Magaziner pointed out that Rhode Island’s GPs are not over charging or incorrectly billing for expenses, but added: “There’s no question, though, that the way the industry is structured it could be more transparent.”

The disclosing of information on a quarterly basis is more of an issue in today’s private equity industry because investors in pensions, as well as trustees and a retirement system’s executive staff, all demand more accountability, says David Fann, chief executive of TorreyCove Capital Partners, a firm that advises institutional investors on fund commitments.

“When the industry began 30 years ago, carried interest was something that didn’t need to be finalised until the very end of a fund because accrued carried interest can change from quarter to quarter,” Fann says.

Some industry participants say that the level of transparency among fund managers can vary depending on the size of the market segment.

Brett Palmer, president of the Small Business Investors Alliance – which represents the interests of lower middle market GPs and LPs in Washington DC – says: “Our LPs are largely able to dictate their own terms to middle market and lower middle market funds, unlike the larger funds.”

Whether the SEC will introduce a standardised reporting standard for private equity firms or not, one thing is for sure: the focus on transparency is unlikely to go away any time soon.