On January 29, 2016, the Institutional Limited Partners Association (ILPA) released the ILPA Fee Reporting Template (version 1.0) (the Template) along with the ILPA Fee Reporting Template: Suggested Guidance (the Guidance). According to ILPA, a global organization representing private equity fund limited partners (LPs), the Template and the Guidance were developed to promote more uniform reporting practices in the private equity industry. The documents are presented as the first deliverable of ILPA’s Fee Transparency Initiative, which commenced in May 2015, and is described by ILPA as a broad-based effort to establish more robust and consistent standards for fee reporting and compliance among investors, fund managers and their advisers.
The Template and the Guidance are the end result of a 50-day consultation period during which more than 120 commentators (including nearly 50 global LP groups and 25 general partner organizations (GPs), as well as trade bodies, consultants, advisers, fund administrators and accountants) provided feedback on a draft template released for comment on October 22, 2015.
The Template purports to detail all monies paid to the fund manager, affiliates and third parties. It is organized into two sections: A. Capital Account Statement for LP and B. Schedule of Fees, Incentive Allocation & Reimbursements Received by the GP & Related Parties, with Respect to the Fund and Portfolio Companies/Investments Held by the Fund. According to ILPA, each section has a discrete goal of providing LPs with:
- The ability to monitor, aggregate and analyze their direct costs of participating in a given fund. These values being within the framework of a typical LP’s capital account statement.
- A summary of the GP’s sources of economics regarding the fund and the fund’s investments (including reimbursements and any fees not subject to offset).
According to the Guidance, the Template is not intended to replace a fund’s current financial disclosure or to be a substitute for other reports, including capital call and distribution notices, but is intended to supplement such disclosure. ILPA recommends the populated Template be delivered to LPs on a quarterly basis within a reasonable time following the delivery of the fund’s standard reports.
When populating the Template, ILPA recommends content be provided in Excel or digital (e.g., XML) format that facilitates the aggregation and analysis of information. ILPA proposes to make an XML formatted version of the Template available on its website in February 2016.
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 itemized information for certain subtotals, i.e., fees subject to offset and partnership expenses, and fees/reimbursements received from portfolio investments. ILPA recognizes 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 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, ongoing trailing-twelve-month basis.
Also released with the Template is a supplemental schedule for funds of funds to itemize and report fees and incentive allocations paid to their underlying fund holdings.
As noted above, ILPA also released the Guidance to accompany the Template. According to ILPA, the Guidance is intended to communicate the expectations and necessary background to permit LPs and GPs to determine how both parties can utilize the Template most effectively, and assumes that LPs and GPs will have unique needs and resources. Accordingly, ILPA proposes that responsibility for determining how the Template can be used to support such needs should be addressed by individual LPs and their managers. ILPA recommends that LPs and GPs consider the Guidance when deciding how to use the Template.
As of February 1, 2016, the Template has been endorsed by a number of significant institutional LPs, including, the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), the Florida State Board of Administration and the Canada Pension Plan Investment Board. So far, three large institutional private equity management firms have also endorsed the Template.
The release of the Template comes at a time of significantly increased regulatory scrutiny with respect to private funds around the world and in particular in the United States by the US Securities and Exchange Commission. In 2015, the SEC settled numerous enforcement actions against fund managers for failure to properly disclose fees and expenses to their investors. There have been reports that the SEC was consulted with respect to the draft template, which, if true, would be consistent with the SEC’s focus on fee disclosure and related party transactions.
According to the Guidance, ILPA originally sought to publish a white paper and an appendix to the ILPA Principles that would seek to address compliance with a fund’s limited partnership agreement. These documents had been targeted for release alongside the Guidance and Template. As of February 1, 2016, neither the white paper nor the appendix appears to have been published. Subsequent to the release of the Template and Guidance, ILPA proposes to publish in February 2016 revised versions of its "best practices" documents (Call and Distribution Notices and Quarterly Reporting Standards) conformed to reflect the Template.
The Guidance and Template represent the latest salvo in the ongoing negotiations among fund sponsors and their institutional investors. It is likely that the new guidance will help to shape future financial reporting in the private equity industry, and that GPs will experience pressure to increase transparency and provide enhanced disclosure of fees and expenses that affect private equity fund returns.
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