PFM Fees 2016: Elusive standards

When the Private Equity International CFO and COO conference kicked off in New York last February the new fee reporting template issued by the Institutional Limited Partners Association was one of the first items up for discussion. The new guidelines, released weeks earlier, are the latest attempt by ILPA to bring standardization to the industry and transparency on fees. Only a handful of those present were impressed with the idea.

A brief poll of the audience revealed that just 23 percent saw the template as a positive development compared with 43 percent who saw it as negative. The rest were indifferent. In a subsequent poll, 79 percent said their organization was yet to provide feedback on the template to ILPA.

The conference poll was small, so should be taken with a grain of salt, but it wasn’t far off the mark. Thomas Angell, a partner with accounting firm WithumSmith+Brown, was present at the event and says that the dearth of enthusiasm regarding the new ILPA templates was partly because of the number of smaller funds present.

“ILPA has around 300 members, and they are all the largest funds,” he says. “A lot of the smaller funds don’t pay attention to ILPA; they may go have a look and see what is included, but I think it will take a while for the smaller funds to adapt.”

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The pfm Fees and Expenses Benchmarking Survey echoes this lukewarm response. Overall, just 17 percent of respondents said they have plans to implement the new fee reporting template, while 38 percent said there would be no implementation – 30 percent said that they would only look at using a modified format. 

The sampling is too small to give a reliable measure of sentiment across GPs of all sizes. However, it does show a significant proportion of small to medium-sized GPs (those with less than $1 billion in assets under management) have no plans to use the templates, while larger GPs are more likely to use a modified format.

Shay Caufield, executive vice-president and fund administrator PEF Services, echoes Angell’s sentiment, adding that the drive for standardization will initially be limited to the largest LPs and GPs. Meanwhile, she adds that it is the smallest GPs – those with less than $50 million in AUM – that are likely to be the most resistant to the ILPA templates, citing their relative lack of sophistication.

“They are struggling to bring about this type of reporting because they are just not using these types of sophisticated systems to slice and dice information, and get down to a granular level to report on it,” she says.

But there is perhaps a bigger issue surrounding standardization. Caufield adds that while some GPs are making use of the new reporting guidelines, they are not all using the ILPA format. Another issue is that the impetus for adopting ILPA’s fee reporting template does not lie solely with the GPs.

According to our survey, nearly 22 percent of respondents said they only made fee disclosures when asked, while just over 60 percent said they reported fees using an internally developed form or via annual financial statements. Angell notes that many GPs have to deal with the fact that their LPs may not want a one-size-fits-all approach to disclosures. “Everybody each has their own sort of disclosure they want,” he says. “The GPs in some of these funds are preparing 25 different pieces of information to comply with what the LPs want from them.”

He adds that the new template may only serve to add an extra layer of burden to the GPs who already have to respond to each LP’s specific disclosure demands. Meanwhile, Caufield notes that ILPA best practice template, released in 2011, is also struggling to see widespread adoption.

“The ILPA best practices template includes the capital calls, the distributions, the quarterly reporting, and they all grasp at this standardization that nobody has been able to achieve until this point,” she says. “Historically, it has been a painful and selective process.”