Perspectives 2017: Desperately seeking disclosure

Innovations can take time to win over the sceptics. So it is with the fee reporting template unveiled by the Institutional Limited Partners Association in January 2016. Limited partners view the new provisions as a key to continuing their push toward more transparency and disclosure of their private equity investments.

But the initial response from general partners was less enthusiastic. There was widespread concern about the extra burden it would involve, as shown by a poll conducted at the PEI CFOs & COOs Forum in January. Nearly half of the attendees viewed the template’s release as a negative development.

Fast forward to the end of the year, though, and the signs are that the template is winning acceptance. GPs are starting to recognise the need for more robust and consistent standards in fee and expense reporting and for greater disclosure among investors, fund managers and advisors.

At the beginning of November, some of the biggest GPs – Advent International, Apollo Global Management, Blackstone, CCMP, Hellman & Friedman, KKR and Silver Lake – announced their backing of the template. They joined the Carlyle Group and TPG, which endorsed the template early in 2016.

The California Public Employees Retirement System recently disclosed that almost three-quarters of its strategic private equity partnerships completed the ILPA fee reporting template in the second quarter of 2016. About half of its non-strategic partnerships have used the template in the same quarter.

“I think that LP demand, and therefore the level of GP adoption, will vary according to who their LPs are and where those LPs are invested in the market place,” says Jennifer Choi, managing director of industry affairs at ILPA. “The firms you would expect to be early adopters, have adopted it, or they’re in the process of trying to do so.”

Although the speed of adoption may seem slow to some, Choi notes that rates of adoption are generally on track with what ILPA initially anticipated and that it will take about two years to see a meaningful number of GPs delivering their information using the new template format.

GPs who are early adopters are still in the process of collecting data and many anticipate they will start delivering full-year numbers for 2016 before focusing on quarterly data next year.

The extra compliance has brought some inevitable operational challenges for GPs, as it has forced them to carefully analyse their expenses and determine how they will track those with the template going forward.

They also have had to create new internal instructions and processes for their staff and in some cases make technology investments. A number of GPs hope to be ready to comply with the new template within the next year.

LPs understand that it is a lengthy process for GPs and that it will take time for the additional reporting requirements to be adopted, but they are hopeful.

“We are relatively early in the process after implementing the ILPA fee reporting template to provide a comprehensive assessment,” says Ash Williams, chief investment officer at the State Board of Administration of Florida. “However, we welcome any additional transparency and progress toward uniform reporting of fees by GPs.”

State legislatures seem set to speed up the adoption, notably via the California law on fee reporting which comes into effect on 1 January 2017. The bill was drawn up shortly after the release of the ILPA template. Many of the big Californian pension plans, particularly CalPERS, were initially concerned the bill would deter private equity firms from seeking money in California.

“When we began working on the template in mid-2015, we didn’t anticipate the bill in California,” says Choi.

Now she believes the California legislation is going to encourage endorsement by GPs because the private equity firms that take the time to go through the exercise of delivering information in the required format in California will likely consider doing so for their other LPs as well.

“There are still a lot of groups that are waking up to the California bill,” she says. “One of its impacts will be to create wider awareness of standardised reporting, but it might still take some of these GPs one or two years to make the necessary changes to their internal reporting systems to produce this information on an automated basis. It will come down to how many LPs seem to want that information in that format.”

Choi adds that ultimately each LP will be using the information contained in the template in different ways. For those LPs bound by the California legislation, they will have to disclose the data to their constituents at least once a year, although the precise format hasn’t been specified and could come in the form of published annual reports or in a specific presentation in a public meeting.

For LPs with no legal requirements, the data will assist in their decision-making. Some may find it useful in analysing the cost of each GP in relation to performance, while others may use it to forecast and track more precisely cashflow.