What are the factors behind ILPA’s decision to issue the new reporting template now?
The initiative emerged from a confluence of factors, but I believe the genesis was a meeting we hosted in March 2015 among some GPs and our members, exploring the question of transparency in our industry. The message from that conversation was clear: GPs want more precise guidance on the information required by LPs on fees and expenses, and a more consistent process for providing those disclosures.
Given how many ILPA members were seeking to answer questions about fees and expenses with bespoke solutions, the template was a natural next step.
Where were the biggest pain points for LPs looking for consistent disclosure from GPs?
Early in the template development process, it was clear that many LPs, particularly pension funds, operated on different fiscal cycles, and yet the bulk of reporting coming from GPs was being provided on a calendar-year basis. Also, LPs quickly pointed out that things like offsets can appear in a multitude of places depending on the GP – in a footnote or the financial report or as a line item in a capital call. Beyond that, we discovered inconsistencies due to differences in labeling, timing, and methodology among GPs.
How did you ensure that the template would be able to address the needs of investors across various sizes, strategies, interests, and jurisdictions?
We approached the exercise with the understanding that no standard – in any industry – will satisfy 100 percent of all needs for 100 percent of organizations. We solicited feedback from a broad range of LPs, as well as LP advisors such as consultants and fund administrators on the level of detail and the categories that made the most sense.
We then market-tested those suggestions on nomenclature and level of itemization with the GP community, in particular with CFOs at several GP organizations. We continue to take feedback from GPs who are in the process of reviewing and amending their internal accounting and reporting processes against the template. We are very pleased to see that many organizations are getting close to implementing the template guidance for at least some of their LPs.
Financial reporting in private equity reflects the range of circumstances behind each fund, including how fees and offsets are charged, and how expenses are tracked, allocated, aggregated, and reported back to the LPs. But regardless of these differences, it’s abundantly clear to us that most GPs are genuinely trying to be responsive to the information needs of their LPs.
At the same time, LPs’ back offices are not necessarily specialized or singularly focused on PE, which means they are trying to marry information provided in different format by different managers. We’re making great progress, and the template is a step change, but we are still a long way from GPs and LPs being able to manage all this data on a fully automated basis. The data and compliance challenges are very real.
What do you think will be the long-term benefits for GPs using this template?
We believe that efficiency gains will be the greatest benefit, but that’s a function of the extent to which LPs adopt the template as the sole format for requesting fee and expense information from GPs. The full realization of the efficiencies of a standard template will require a consistent effort from all parties. Beyond efficiency gains, providing data in a format that has the blessing of an industry body like ILPA should provide GPs with a competitive edge.
Do you anticipate any resistance from GPs and LPs who might be unwilling or unable to implement the new template?
We can probably all agree on the benefits of standardization, particularly around something like reporting. But adoption is another matter, and it really comes down to supply and demand. If LPs elect to accept sub-par reporting rather than lose allocation, or if only a minority of LPs in a given fund ask for the ILPA standards, there won’t be sufficient motivation for that GP to build the infrastructure and automated process to deliver the data.
Further, if LPs who request the ILPA standard also insist on receiving data in their own bespoke formats, some GPs will be deterred from complying with the ILPA template. On the other hand, there will always be certain GPs that aspire to be considered best-in-class who will be the first to embrace what the LP community has put forward.
Too, there’s the aspect of providing guidance for the next generation of GPs. An emerging manager keen to have state of the art reporting may look to the template guidance as a way to start out on the best foot possible. System readiness and infrastructure also plays a role for LPs, who may be cautious about asking for the new standards until they have the right vessel to receive and analyze that information.
LPs recognize that by asking for the data, they incur a responsibility for using it to inform their decisions.
Outside of ILPA’s direct influence, are there any other factors you hope will encourage broader adoption of fee reporting standards?
An increasing number of state-level legislative initiatives are focused on transparency and mandating a minimum level of reporting on costs by public plans. This may raise the bar regarding the quality of reporting needed to access public capital over the longer term in certain states. The SEC’s focus on disclosures and their consistency with the LPA sets a very favorable backdrop for standardized reporting.
The SEC’s remit, however, does not extend to the reporting specifically to an individual LP in a single fund – they are looking at processes for an advisor and across fund families. It will always be incumbent upon LPs to assert their particular reporting needs. Beyond legislation, market forces will certainly factor into adoption. Should the market shift and capital become scarcer, we may see greater momentum from GPs towards standardization.
Looking ahead, what will be the next step for ILPA in this drive for more transparency?
Today we have 68 endorsing organizations, including GPs and LPs, with more coming forward nearly every day. It will take time for LPs and GPs to fully integrate the template into their processes, perhaps a year or two, and we will be keeping a close eye on how the ILPA can best support this evolution.
This will can be done by clarifying the guidance, encouraging service providers to build solutions to facilitate standardization, or celebrating the efforts of the pioneers who have taken steps towards automation, such as the AltExchange initiative. There is a tremendous market opportunity here for third parties that can cost-effectively simplify the process of exchanging data between GPs and LPs.