Asset owners embracing private equity fee-disclosure template

Updated with correction

More pension funds aren't just talking the talk on private equity fee transparency — they're asking general partners to use a new, standardized disclosure template introduced earlier this year.

Since the template's creation in January, 42 limited partners have endorsed the form, which details fees, expenses and carried interest, up from 21 at its introduction. About half of those limited partners require its use in some way, said Jennifer Choi, Washington-based managing director of industry affairs at the Institutional Limited Partners Association, which created the form.

Such standardization helps board members as well as participants make comparisons between general partners, as opposed to wading through an undecipherable data dump, sources said.

“The key point here is getting people to coalesce around a single approach, a single standard,” said Ms. Choi. “Most (general partners) supply these figures, but (each) in a different fashion. ... It could be in financial reports, in footnotes, in capital calls.

“It's one thing to require GPs to provide information,” Ms. Choi noted, “but it has to be disclosed in a way that makes it understandable and easy to compare with data from other GPs. ... If you're comparing total net and total cost, you need to make sure you know how they make the sausage. That's the big challenge here in the private equity world.”

Clint Zweifel, Missouri state treasurer and a board member for the $7.7 billion Missouri State Employees' Retirement System, Jefferson City, said private equity fee disclosure should be the same as other financial reporting in terms of what's required and how it's displayed.

“It would be nice to have a standardized way to measure, just like everyone else in the financial world,” said Mr. Zweifel, who has endorsed the form. “ILPA is step one. Step two is, if collecting this information as a public entity, to follow through with how fees are disclosed, take that information, and disclose it in a way that makes sense to taxpayers and beneficiaries. There's a movement that's grown here. Every sector is being more transparent. ... We know private equity plays an important role and pension funds value that role, but collecting all information on it is of primary importance to our participants.”

MOSERS and the $28.2 billion South Carolina Retirement Systems, Columbia, were cited in a report from Pew Charitable Trusts as two of the pension funds to first seek both performance and invoiced management fees from their private equity managers. That report, released Feb. 18, stated that disclosure policies among 73 public pension funds with a combined $2.9 trillion in assets varied widely and made it “difficult for policymakers, stakeholders and the public to gauge the actual performance of these funds.”

As a reporting officer at the South Carolina system, Lorelei Graye had been tasked with finding fee information on the system's alternative investment portfolio. Since mid-2015, Ms. Graye has been a consultant, product development, at Conifer Financial Services, New York, providing that fee disclosure service to pension funds, including South Carolina.

Ms. Graye said that public plan executives only recently have begun to look at costs involving private equity funds as opposed to concentrating solely on returns.

“I run into the same thing all the time; that all that matters is net-of-fee return,” Ms. Graye said. “But if you're not measuring, you're not managing. So how will you know that there's no impact from what's paid in fees? It became a headline risk for public plans. Stakeholders want to know what you're paying, are you monitoring it, do you understand the terms, and what's the impact in dollars?”

ILPA's Ms. Choi said implementation of the fee disclosure template among the association's pension fund members is in one of three stages: requiring current and future private equity managers to use the ILPA template; exempting current managers, but requiring all future managers to use it; or the pension funds' boards discussing whether to use the template or maintain current disclosure policies.

Missouri's Mr. Zweifel said private equity remains an important component in a fund's overall investment strategy. But it's equally important to have clarity on fees. As of Dec. 31, its $1.5 billion private equity portfolio returned an annualized 10.4% for three years, 11.1% over five years; and 8.3% over 10 years.

Currently, MOSERS' custodian, Bank of New York Mellon Corp., assists with fee information collection, Mr. Zweifel said. Because the custodian bank helps MOSERS create the infrastructure to monitor the fees, it will help ensure that the data supplied by the general partner is accurate, he added.

Christopher J. Ailman, chief investment officer of the $178.7 billion California State Teachers' Retirement System, West Sacramento, said he loves the new ILPA template. “I think everyone will see the value of a common reporting template,” Mr. Ailman said in an interview.

CalSTRS announced its endorsement of the template in February, and in an open letter at the time to its private equity managers, CalSTRS officials asked them to comply with the template's reporting practices.

It is still early days for adoption, Mr. Ailman said, as it will take time for investors to tweak their data systems. “A lot of limited partners have privately built data systems. I'm hoping with standardization we will see more software packages” that will allow limited partners to make use of the standardized reporting, he said.

While pension funds have begun embracing the ILPA template, private equity managers have not endorsed it at the same pace. Ms. Choi said only two managers, TPG Group and The Carlyle Group, have publicly endorsed the use of the template.

“Some (GPs) have legitimate concerns,” Ms. Choi said. “Is it going to be this detailed template plus other templates that LPs have created on their own? That's a very legitimate concern.”

“Not all GPs are created equal,'' Ms. Choi said. “The back-office reporting functions required to do this, smaller firms might not be technologically capable of doing this. LPs are cognizant of that and are willing to work in a timeline that works for both sides.”

Ms. Choi said she expects most large GPs by 2017 should be able to use the template, but she wouldn't hazard a guess as to how many firms would or what size they would be.

At Carlyle, the decision to endorse the ILPA template was based on the firm being “very comfortable culturally with disclosure” along with “a strong business interest with being supportive,” said David M. Marchick, managing director, global head of external affairs, Carlyle, Washington.

“We have a lot of (pension fund) clients who care about this a lot,” Mr. Marchick said. “If there can be some standardization of disclosure that would benefit them and us, we feel it's important to support it.”

Thomas B. Mayrhofer, managing director and CFO of Carlyle's corporate private equity segment, said Carlyle's size has made it easier for the firm to endorse the ILPA template than for other managers. Mr. Mayrhofer, who helped ILPA with creating the standardization template, said the firm has “invested a lot of money in reporting, and we were already providing this information” to Carlyle clients. “And if we could customize our systems to provide the last 10% to 20% of disclosure that's required, the gap between the ILPA standard and what we were doing, for us, wouldn't be that big.

“If I'm an investor, I'd want to know the information behind the fees,” Mr. Mayrhofer added. “With all of our large peers in the industry, with hundreds of other firms out there, there will always be the potential that a bad actor could be out there. I think it's right that investors should look at this.” n