Heard on the sidelines

Why can Google be an influential factor in your next fundraise? When does ‘2 and 20’ make little sense for your firm? And more importantly, when is lunch? 

These and other questions were popular topics of conversation at the 10th anniversary of Private Equity International’s CFOs and COOs Forum. PE Manager was there in full-swing, and the hundreds of delegates in attendance provided us plenty of unique perspectives, and a few off the cuff remarks, we feel are worth broadcasting to a wider audience: 

“It’s weird that in our industry every firm negotiates the same basic fee structure. We should ask, well why?” 

Many CFOs attending the conference had fun challenging one another to explain why “2 and 20” is still the industry’s standard fee model. Does it make sense that every firm, regardless of its size, strategy or number of employees, is allocated a 2 percent cut of committed capital to finance overhead costs? CFOs at the conference weren’t always sure what the alternative should be, but an honest look at the budget (and likewise acknowledgment by LPs that firms need money to retain talent) was considered a good starting point. 

“We’ve heard a lot from LPs about whether we use ILPA templates. We don’t use the exact template, but about 95 percent of the information it requests is in our reports. It’s just in a different format.”

With much discussion around adoption of reporting templates crafted by the Institutional Limited Partners Association (ILPA), many delegates were curious to hear from their peers how information was presented to investors. An audience poll revealed a strong majority of firms have yet to use ILPA’s format in their own reporting, but do use the guidelines to better understand what information LPs want in fund reports. Looking forward, some delegates predicted that firms who do not eventually move to ILPA-style reporting may have a strike against them during their next fundraise. 

“We know how to use Google, and we’re not shy to use it when choosing our GPs.”

LPs in attendance were quick to agree that their operational due diligence has advanced significantly in the post-Madoff environment. One specific area of due diligence discussed was compensation. LPs want to be convinced the firm’s top talent is being paid fairly enough to stick around for the long-term; and want a complete breakdown of how carried interest is being allocated amongst the partners and employees. A representative from ILPA  underscored the trend by revealing the LP trade body plans to unveil a standard Due Diligence Questionnaire (DDQ) sometime this spring. GPs, for the most part, seemed to welcome the development. 

“After registration with the SEC, the real major change wasn’t how we operate, but how we document things.”

One popular topic of conversation at the conference was the growing pains that come with SEC-registration. Many chief compliance officers in attendance had only fallen under the SEC’s watch last March (the deadline registration date for firms managing north of $150 million in assets), and described a need to regularly educate the firm’s personnel about what can be discussed on email, how to pre-clear trades and rules on political contributions. At other points during the conference, compliance professionals discussed the SEC’s recent efforts to better educate itself on the private equity asset class to aid them in their examinations. 

Of course we couldn’t capture every memorable comment made during the conference, but the overall theme of this year’s event was one of “growing sophistication”. Growing sophistication in how LPs investigate GPs’ claims and performance history; in how regulators supervise the industry; and to the delight of delegates, in deal partners' understanding (and by extension appreciating) the vital role that CFOs and COOs play in the firm’s success. On the regulatory front, the question now is whether that theme will continue as 2013 progresses. We therefore invite you to take part in our Private Fund Compliance Forum: New York this May. Hope to see you there.