New UK fee transparency guidelines stand up to PE scrutiny

Investors into all types of investment funds are demanding more information about the costs they bear for any given investment. Although, of course, investors are mainly focused on their net-of-fees returns, they also want to know the costs of any given investment strategy, and how much they are paying in fees. And they need to receive that information in a clear, concise format, and (ideally) one that allows fair comparisons across different investments.

As a principle, that sounds straightforward enough. In practice, finding fair ways to present the information can be challenging, especially if rigid templates are produced that do not accommodate the specificities of any given asset class. Private fund managers are used to that problem. Any manager who has produced a “Key Information Document” – mandated for funds sold to European retail investors since January 2018 – knows that generic templates are problematic (and a new consultation by pan-EU regulator ESMA could compound that problem for European Long Term Investment Funds).

In the UK, the Financial Conduct Authority identified cost reporting as an area for improvement in its wide-ranging 2017 asset management study – and not just for the benefit of retail investors. The FCA wanted to see “more consistent and standardized disclosure of costs and charges to institutional investors”, and (somewhat unexpectedly) included private equity fund managers within the scope of its final recommendations. The FCA then set up the Institutional Disclosure Working Group, which recommended some cost-reporting templates in 2018. Those templates have now been finalized and were launched this week by IDWG’s successor body, the Cost Transparency Initiative. The FCA subsequently welcomed publication of the templates and, like CTI, expects them to be widely adopted by UK pension funds and, perhaps, other institutional investors. Both the FCA and CTI will review take-up next year, and the UK government has made it plain that it is willing to mandate adoption of the templates if investors and managers do not adopt them voluntarily.

The good news is that the templates do try to accommodate the specificities of private equity – as a direct result of full and early engagement by the industry with the process. Gurpreet Manku, the BVCA’s Deputy Director General, is on the CTI board, having been a member of the private equity sub-group of IDWG. And, following the recommendations of IDWG (which commended private equity’s constructive approach in its final report), CTI has produced a private equity-specific template and a helpful Glossary of Terms to accompany it. This template was “road-tested” by a number of firms during the consultation process, and CTI specifically acknowledges that firms do not need to complete it if they use the ILPA model. CTI says that its template uses terminology that is more familiar in the UK and Europe than the terminology used in ILPA’s version, and it is based on the Invest Europe Investor Reporting Guidelines to help achieve greater consistency.

Private equity and venture capital fund managers certainly have to engage positively with initiatives like this if they want to widen their investor base. This exercise looks like a model in constructive engagement, and the outcomes look positive for managers and investors alike. The European industry should push for a similar approach across the EU, to avoid the rigid one-size-fits-all templates managers are currently struggling with.

This article was written by Simon Witney and John Young and it first appeared on Debevoise & Plimpton’s European Funds Comment.