Fee Reporting Template
On 29 January 2016 the Institutional Limited Partners Association (ILPA) published a new template to standardise the reporting of fund fees and expenses. This is the first publication of ILPA’s Fee Transparency Initiative (the Initiative), launched in May 2015, in an effort to establish consistent and robust standards for fee reporting and transparency amongst the private equity community.
Purpose of the template
The template is designed to supplement a fund’s standard financial disclosures rather than be a substitute for other reports. According to ILPA, the goals of the template are to provide LPs with:
- the ability to monitor, aggregate and analyse their direct costs of participating in a given fund; and
- a summary of the GP’s sources of economics regarding the fund and investments made by the fund (including reimbursements and any fees not subject to offset).
In order to create the template, ILPA canvassed the opinion of more than 120 commentators (including nearly 50 global LP groups and 25 GP organisations, as well as trade bodies, consultants, advisers, fund administrators and accountants).
Standardisation and endorsement
As evidenced in its Private Equity Principles (published in 2009 and re-released in 2011 – the “Principles”), one of ILPA’s concerns has always been potential mis-alignment of interests between GPs and LPs as a result of excessive GP fees or inadequate disclosure of fund expenses.
Given the complexity and variance of terms across fund agreements, GPs have traditionally been concerned that standardised fee reporting would be difficult to implement and have either relied on LPs to organise and categorise the information provided in a fund’s audited financial statements as they see fit or, increasingly, been involved in producing various bespoke reports according to specific LPs’ requirements. The template seeks to present a standardised way for GPs to present the information that LPs need without placing a significantly larger administrative burden on GPs, and so should be beneficial to both GPs and LPs. It has so far has been favourably received by a number of significant institutional LPs and endorsed by three large institutional private equity management firms.
Adoption by GPs
It is expected that it will take a year or more for GPs to accommodate and adapt their processes to be able to provide a clear report of all the information covered by the template. ILPA has helpfully published guidance to the template which can be found here. In a significant departure from the draft template and as a compromise with GPs, the template provides for reporting on a year-to-date basis rather than a more onerous, on-going trailing twelve month basis.
Levels of reporting
To ensure that the level of reporting is appropriate for both the relevant fund and its LPs, the template includes two levels of reporting: Level 1 and Level 2. Level 1 data is higher-level summary content considered by ILPA to be the minimum baseline to be provided to all fund investors. Level 2 data is more granular and includes itemised information for certain subtotals, i.e. fees subject to offset and partnership expenses, and fees/reimbursements received from portfolio investments. ILPA recognises that many LPs may be satisfied with Level 1 data only, but recommends that GPs seek to produce and make available both levels of data to investors.
In addition to the fee reporting template, the Initiative has produced recommended guidance; and intends to publish a white paper recommending an expanded role for third parties and advisory boards with respect to fund compliance reviews later in February 2016. ILPA also proposes to publish revised versions of its ‘best practices’ documents (Call and Distribution Notices and Quarterly Reporting Standards) conformed to reflect the fee reporting template.
A full review of the original Private Equity Principles will be undertaken later in 2016.