The Institutional Limited Partners Association (ILPA) deserves credit for wading into the furor over fees with its recently released reporting template.
Fees have always been an industry talking point: LPs have for years been negotiating them down in various ways, but non-industry outcry over fees reached fever pitch in the past few months, with a number of bloggers – and even some mainstream media – taking complicated issues and erroneously simplifying them to paint major LPs, who ILPA represents, as hoodwinked investors. Meanwhile, the SEC has been using enforcement action to push for change on fee-related practices and politicians have gotten in on the action, too.
So it was important and timely for ILPA to try and find some solutions. But ILPA’s new fee reporting template, which it released for a consultation/comment period last week, won’t be enough. The industry needs auditors, specifically the American Institute of CPAs (AICPA), to force GPs to change practice by writing new accounting guidance.
While on the one hand, ILPA’s influence is significant and managers who don’t follow its guidelines risk losing out on some commitments, on the other it seems many GPs have ignored some of the trade body’s other templates, including ones for capital calls and distribution notices, without any real ramifications.
One fund of funds CFO, who sees hundreds of fund financial statements on a quarterly basis, estimated that only 10 percent of managers use the ILPA templates that have already been established. Fee reporting is a hot issue at the moment, but a number of GPs argue fee information is already reported in the fund’s financial statement and feel reorganizing the data into a new template is a ‘nice-to-have’ not ‘must-have’ for investors.
That said, investors are increasingly becoming agitated by the hodgepodge of bespoke reporting templates used by managers. It’s in GPs’ best interests to minimize the problem from an investor relations standpoint. Auditors can help assuage the tension.
By issuing technical guidance based on a reading of current accounting standards issued by FASB, the AICPA can require a minimum set of disclosures to be contained in the fund financial statement. Doing so would attack the problem at its source. ILPA’s fee template is one step removed from where standardization needs to happen in that it asks managers to extract information already contained in the financial statement for purposes of completing a common reporting template. By requiring some level of standardization in the financial statement itself, managers would be saved from a time-consuming (and some claim impossible) exercise. Happily, ILPA has already made headway by looking at how complex items like fee offsets and carried interest since inception can be documented.
What’s more is that the AICPA could provide an immediate gold standard on disclosure practices. CFOs often wonder what the smartest way to present cost information is, and rarely are privy to other financial statements to decipher best practice. The AICPA has already proven its ability to standardize reporting practices in the private equity industry. In 2009, the group published technical guidance requiring investment funds to account for carried interest as if it was earned, at the reporting date, even if a realization event had not yet occurred, which had the immediate effect of standardizing certain carried interest disclosures in GPs’ capital account statements.
For this to work, the AICPA, of course, has to give the issue its attention. There are legitimate questions as to whether the AICPA would be able to dedicate the resources needed to tackle this issue, but remember that, as reported in pfm, the group has already assembled a taskforce to create bespoke guidelines for private equity and venture capital valuation estimates.
Pfm has reached out to the AICPA to gauge its interest in the matter, and we’ll report back once we receive a response. It is our hope that it takes up the cause, because, ILPA alone can’t force all managers to standardize fee reporting.