The US-based not-for-profit group now counts more than 10 members, including institutional investors, advisory firms, banks and investing services providers, founder Lorelei Graye said. Allianz Capital Partners, a unit of German financial giant Allianz SE, is among the group’s early members, The Wall Street Journal previously reported.
The group is concentrating on attracting a meaningful number of private equity investors first before trying harder to recruit fund general partners, Graye said. She expects the organization to gain more clout within the private markets industry as its investor membership grows.
“When you reach about 15% of their investors, GPs start to have an opportunity to scale by participating,” she said.
A standard for cost and performance reporting would not only increase transparency in the industry but enable private equity fund managers to automate the transfer of data to their investors, benefiting both sides of the relationship, said Mike Heale, a principal at CEM Benchmarking, another early member of the group. The Toronto-based firm helps institutional investors compare investment costs and performance to the broader market.
Investors spend a lot of time and money extracting and reformatting fund data from digital documents, Heale said. On the other hand, he added, fund managers face different demands from investors for customised reports. “Developing these common data standards would make their life and the amount of work [private equity firms] have to do easier as well.”
In an initial step toward developing standards, Graye said her group is reviewing previous efforts worldwide to see what could be incorporated into a “dictionary” that describes the myriad components into which private equity fund fees, expenses and returns can be split. These efforts include a reporting template released by the Institutional Limited Partners Association in 2016, as well as a method of investment-cost reporting laid out last year by the UK’s Cost Transparency Initiative.
“We’re in the assessment and collection phase,” Graye said. She added that her group expects to have a draft standard it could open for industry comments by next year.
The ILPA template was developed after the US Securities and Exchange Commission in 2014 identified some irregularities in how private equity managers reported fund fees and expenses to investors, said Jennifer Choi, ILPA’s managing director of industry affairs. The SEC continues to find similar irregularities, according to a risk alert the regulator issued in June.
Among other issues, the SEC found that private fund managers “inaccurately allocated fees and expenses” to investors, charged investors for expenses not covered by fund operating agreements, and “failed to comply with contractual limits on certain expenses,” the report said.
Standards would help make reporting of fund fees and expenses more consistent and prevent missteps, Heale said.
“Right now there’s a lot of latitude over what gets reported,” he said.
To increase her group’s chances of success, Graye said its status as a not-for-profit organization is important to help avoid the perception that the effort is driven by profit-seeking. Concern that previous initiatives seeking to establish private equity standards were aimed at producing commercial gains helped lead to their failure, she said.
Graye recently disclosed that she has become an adviser to Qashqade AG, a Swiss startup that develops software to help private equity firms and investors calculate carried interest and other fund metrics. Graye, who has invested in the company, said Qashqade could benefit from a private equity reporting standard if one is adopted industrywide, but the company wouldn’t have any special advantage over other investment-service providers.
“It’s not in direct conflict with any of our members,” Graye said of her role in the company. “That was very important to me.”
Source: Wall Street Journal
