LPs are experiencing heightened regulatory scrutiny causing them to inundate their fund managers with data requests, according to market sources.
“The need to provide this kind of transparent reporting, for investors to see right through to the end investments, is increasing driven by a swathe of regulation at the local and regional level,” said Hugh Stevens, head of private equity and real estate solutions, BNP Paribas Securities Services. Stevens also said a growing interest in environmental, social and corporate governance (or ESG) is driving the trend.
For example in Australia, under a package of new reforms, trustees of Australia’s superannuation schemes, which essentially make up Australia’s LP base, may have both civil and criminal liability if their fund governance is found lacking. To cover their bases, LPs in Australia are requesting more fund data for oversight purposes.
Likewise in the US new accounting regulations are encouraging LPs to demand more fund information. Earlier this year the Governmental Accounting Standards Board (GASB) released an exposure draft that better codifies how state and local governments should define and measure fair value. Sources say the draft is already influencing how much information LPs are requesting so they can work out a time estimate of when they expect the fund to be liquidated and whether the investments are likely to be sold for amounts different from the net asset value per share on the secondaries market.
On the ESG front, sources say that portfolio company supply chain concerns are becoming a bigger blip on LPs’ radars. “It’s not at the point yet where most GPs are actively managing this issue, but it’s coming up in more conversations with investors and portfolio company executives,” says Ryan Miller, an associate at Malk Sustainability Partners, a consultancy on ESG matters.
The demand for this level of reporting from investors – involving unprecedented quantities and complexity of data – is not easy for GPs to satisfy, according to Stevens.
Nonetheless, sources stress LPs still fully expect GPs to deliver the data, with a percentage ready to walk away from GPs who are unable to guarantee delivery during fundraising.
“We have seen private equity fund managers being rejected by investors for the very fact that the managers' reporting capabilities were not sufficient; the ability to provide this information is becoming a serious differentiator for funds and fund managers, who will have to demonstrate their ability to satisfy the requirements of investors, or be left behind,” said Stevens.
For a more in-depth look at the reporting relationship between GPs and their LPs be sure to check out the November issue of Private Funds Management.