A lack of standards on how to break down the various expenses incurred by private-equity funds, as well as the fees they charge investors and portfolio companies, increases the risk of cost misallocations, industry experts say.
In addition, fund-data reporting is costly for both fund sponsors and investors, as much of it is done using digital documents that general partners create and investors must disaggregate, according to Lorelei Graye, founder of ADS Initiative. The not-for-profit group in Lexington, SC, is developing reporting standards for fund costs and performance.
“GPs are paying their back offices and their providers to create reports that are in PDF and Excel. Investors have to spend money on their own back offices and third-party providers to scrub and normalise that information,” Graye said. “It’s not an efficient process.”
Graye was part of a working group that the Institutional Limited Partners Association formed years ago to develop an Excel tool for reporting fund fees and expenses. Rolled out in 2016, the so-called ILPA template was a step in the right direction because it defined many of the fee and expense components in fund-data reporting, she said.
But to eliminate unnecessary costs, she said, the industry needs standards that make automated reporting easier.
“Excel was never meant to be the ultimate vehicle for transportation,” Graye said.
Two “behavioural changes” are needed to realise a longtime industry dream of automated fund-data transfers, said Jennifer Choi, ILPA’s managing director of industry affairs. Private-equity managers must be willing to adopt reporting standards, and their limited partners need to invest in data systems upgrades, she said.
At least on the investor end, Choi said an increased interest in data science signals that they have begun making the needed changes. That could eventually drive fund managers to embrace reporting standards as well.
“The GP who does not make steps towards easier transmission of data from point A to point B will be at a competitive disadvantage,” Choi said.
As has happened in other cases of standards adoption, a few large players — or a regulator — could tip the balance and convince the industry to change its ways.
Source: Wall Street Journal
