The issue of fees and expenses came to the fore in the fourth quarter when pfm published the Fees and Expenses Benchmarking Survey 2018 showing that GPs are becoming more selective in exactly what they charge to the fund. That’s partly the result of a crackdown by the Securities and Exchange Commission, which has yielded tens of millions of dollars in fines for inadequate disclosures. It’s also a reaction to the success of the drive by the Institutional Limited Partners Association for greater transparency.
Investors are forcing GPs to be much more detailed over the data, but issues remain, notably over what Tom Angell of WithumSmith+Brown termed a worrying “wait-and-see approach” revealed in the survey as to whether fees will be renegotiated at the time of a fund restructuring.
Blackstone’s chief legal officer, John Finley, spoke with pfm about the importance of technology in enhancing the client experience, saving time and obtain better information. Blackstone’s in-house tech team, Blackstone Innovations, has its own office in New York. A member of the innovations team sits on the legal team’s technology committee and the two teams work together to automate more tasks and reduce the reliance on paper, Finley told pfm.
One example is the transformation of its anti-money laundering system. Finley’s team moved from a manual hard-copy system to a proprietary product developed with the innovations team, streamlining documentation requests according to risk rating and investor type.
The uglier side of technology was a focus at the 2018 Private Fund Finance & Compliance Forum, where executives voiced their growing concern over phishing – where cyber criminals will pose as employees to try to get funds transferred to their bank accounts.
Consultants stressed the importance of training all employees, including CFOs and CEOs, as senior executives are the most likely to be targeted.
With global private equity fundraising at record highs, domiciles were busy revising their tax and regulatory regimes to compete and attract capital. One tax lawyer said Luxembourg was bolstering its position as first choice for a lot of managers and investors in Europe thanks to new laws bringing in English-style limited partnerships, which are much more flexible than historic Luxembourg vehicles. Brexit is also encouraging the switch to Luxembourg.
Transparency issues were a regulatory focus in November when the UK’s Financial Conduct Authority launched a Cost Transparency Initiative to encourage the adoption of a dedicated private equity fee reporting template. The template builds upon a template created by the Institutional Limited Partners Association in 2016. The FCA template uses terminology “more familiar” to the local market and follows the level of detail it set for its main account template, which does not apply to private equity, according to a working party.
The templates are currently being trialed. But UK-based investors tell pfm that private equity still needs to do more in terms of transparency. “There’s a very big gap in what we could be doing as an asset class in helping LPs feel like this is not a pure black box,” says Elias Korosis, partner at London-based fund of funds Hermes GPE.