With the latest headlines focusing on the Institutional Limited Partners Association’s (ILPA’s) new template to standardize the reporting of fund fees and expenses, private equity managers are under increased pressure to not just reduce their fees but provide more transparency into their charges. However, typical business practices and technology limitations are making it difficult for both general partners (GPs) and limited partners (LPs) to fully address these challenges.
In some ways, it could appear that investors are at an advantage, because with more funds going into private equity, there’s more competition. So investors have more power to ask for a reduction in fees as well as demanding a better understanding of what exactly they’re paying for. However, both GPs and LPs are hindered by business and technology limitations. For example, vague agreements may mean that fees are not being explicitly disclosed or accounted for.
While larger investors may have the resources to request and interpret more transparency, smaller firms often don’t have such an advantage. Moreover, LPs’ reporting processes are usually manual, which limits their ability to understand and monitor what they are paying.GPs don’t have it much easier. For example, while ILPA’s proposed fee template was created to address this, many GPs simply don’t have the process or technology they need to produce this data at the level being recommended by ILPA – even if they want to.
The industry efforts driven by ILPA and AltExchange are a valuable start. But it’s equally important to look at the micro level as well as the macro – the actual functionality that will be required to increase the transparency around fees.
For instance, to generate and analyze fee data, LPs and GPs need the ability to automate and reconcile the information. This will also simplify the process of sharing data from end-to-end. So not only will firms improve transparency and accountability, they’ll increase internal efficiency and reduce costs.
Beyond automation and reconciliation, there are four other areas that deserve an LPs’ focus. The first is infrastructure: LPs need both the resources and the technology to help them efficiently aggregate and consume fee data. The second is governance. Regular audits, as well as policies and procedures that explicitly detail the fee disclosure requirement will shed much needed light on what’s being charged and paid. The third piece of the puzzle is a single dashboard where LPs can interpret, analyze and validate fees that have been paid to managers. Standards are the final piece. A partnership between GPs and LPs, along with the underlying infrastructure, will allow LPs to understand and meet their contractual requirements.
Just like LPs, GPs also need to look at both technology and behavioral change. With the right tools and systems, GPs will be able to track and capture the granularity requested by LPs. At the infrastructure level, they need the resources and technology to facilitate the aggregation and consumption of the data. The final challenge for GPs is psychological: they must accept that they need to respond to what LPs are asking for.
If LPs and GPs share the responsibility to address the twin issues of technology and behavior, they can reduce the confusion around fees, increase efficiency and transparency, and even boost the image of this often opaque market.
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