The Institutional Limited Partners Association updated its reporting template and created a new performance template, aiming to offer consistent performance reporting and fill the transparency gap left by the demise of the SEC's private adviser rule.
The templates, which were released in August, will be available for public comment through Oct. 11.
The Securities and Exchange Commission’s private adviser rule would have required increased disclosure from private fund advisers, prohibited certain fee arrangements and required a fairness opinion for some secondary transactions.
“We knew as we worked on it that there was a strong possibility that the rule would be overturned,” given the jurisdiction in which the case was filed, the 5th U.S. Circuit Court of Appeals in New Orleans, said Neal Prunier, ILPA’s managing director, industry affairs.
A prior version of the updated guidance was originally launched for public comment in June before the federal court overturned the SEC rule, but ILPA officials revamped it, in collaboration with limited partners, general partners and fund administrators, cutting some sections and extending the implementation deadlines.
The updated reporting template is designed to supplement private funds’ standard disclosure and provide more disclosure on fees and expenses. It would apply to future funds as well as existing funds that are still in their investment period.
The aim is to give investors in a standardized manner more visibility into what fees and expenses are being charged to them and how the money is being used, Prunier said.
For example, the latest reporting template update introduces a section on fees charged for work of third-party and internal related people. This section of the template would give investors information about fees being charged for work being done by the private equity manager’s staff and fees charged for third parties' work.
Armed with this information, an LP could ask its GP why it is being charged a separate fee for work done by internal staff rather than that work being part of the fund’s management fee, Prunier said.
Some information that had been included in the version that was launched in June has been removed, such as a section asking for subadviser fees, and consulting, servicing, administrative and trustees fee offsets, in part, to ease its adoption by the private equity fund manager community.
Standardize performance
ILPA’s new performance template is the industry group’s effort to standardize performance reporting by the private equity industry. The performance template has three tables: cash flow, fund performance and portfolio performance.
The fund performance table, for instance, aims to provide LPs with since-inception performance data, based on cash flows between the fund and its investors, including net internal rates of return and total value to paid-in capital, with and without the impact of fund-level subscription lines of credit. The same information for gross IRR and gross TVPI is optional because “a good portion of the industry does not provide that performance metric,” Prunier said.
If the SEC’s private fund adviser rule still existed, that information would be required, he said.
However, ILPA officials took “an adoption-oriented approach,” Prunier said.
ILPA is trying to standardize performance reporting, he said.
“We’re going from zero,” Prunier said. “We were not able to get 100% of what we want it to be,” but the organization can revisit that template in the future.
For now, this new performance template will help move the industry forward on the issue of standardized performance reporting, he said.
While the comments ILPA is receiving from the industry about the templates are kept secret, at least one industry participant, State Street Corp., is a fan of the templates.
Marianne Oar, a managing director and head of private markets product management, and Vipul Bhushan, private markets product manager for State Street, said in a joint response to Pensions & Investments’ questions that the updated template balances “the burden of gathering and maintaining the required, underlying data with the benefits of transparency and enhanced disclosures which fund investors can understand and essentially could enhance their understanding of their investments.”
One of the primary advantages of the performance template is giving investors the ability to compare performance over time and across funds in an “apples to apples” manner, Oar and Bhushan said. At the same time, the performance template allows “service providers to maintain and provide performance measurement uniformly to all clients,” they said.
What’s more, this type of discipline of a standardized performance measurement of private funds provides assurance to “the public and regulators that the private markets industry is capable of self-governance and good practices,” Oar and Bhushan said.
ILPA’s collaborative approach to drafting the templates “ensured that diverse experiences and perspectives were represented, and that these were documented in a way that all industry players could understand and use," they said.
“State Street’s perspective as a longtime and premier service provider to private markets funds and private market fund investors is that these templates put forth a standardized format to enhance access and transparency in private equity reporting for everyone’s benefit,” they said. “The current comment period should serve to improve and fine-tune these templates for broad adoption."
ILPA’s initial reporting template adopted in 2016 is being used by about 40% to 50% of the industry, Prunier said.
Technical development and the use of fund administrators rather than fund managers doing the work in-house has increased adoption, he said.
“We recognize that we’re not going to get to 50% (of the new templates) overnight, but we’re taking an adoption mindset,” running a collaborative process, Prunier said.
