With the FCA aiming to improve the reporting of costs to institutional investors, the Institutional Disclosure Working Group (IDWG) was set up to review reporting practices, including those of private equity. The IDWG’s successor – the Cost Transparency Initiative (CTI) recently released its reporting templates, aimed at capturing the minutiae of fees and expenses.
The release of a new template highlights unrelenting investor demand for standardised reporting. For managers adhering to reporting levels set out in LPAs, adopting new templates that need to be retroactively fitted is deeply complex.
David Jolly, Partner at Coller Capital says: “Clearly LPs have been asking for standardised reporting for a long time, and as an LP, we can see the benefits of it. But, when you start to get into the detail, it’s not as easy as simply creating a template. There is such a vast array of transaction types, structures, stages – almost an endless list of potential data points and information for different scenarios.”
Devil in the detail
Indeed, new information requirements are being driven by the need for greater transparency and understanding of costs. But simply demanding more granularity on fees and expenses could do more harm than good.
On the surface, providing greater detail on fees is added work. When it comes to transaction fees for example, managers must now split out the different types, including underwriting fees, monitoring fees and director fees. Similarly, any kind of rebates received back to managers must be disclosed. “Previously there would have been the net management fee disclosed to investors. Now this needs to be grossed for other items such as rebates,” explains James Bryant, Head of Operations at Highvern.
Understandably regulators, investors and managers themselves are seeking simple and effective solutions, but there are few things in life that can be fully captured by filling out a binary form.
On closer inspection, the templates demand details of aborted deal costs but, as Bryant points out: “This will open up more questions, such as why one manager recorded more aborted deal costs than others? And there could be whole variety of reasons for that.”
Another example of where relaying only parts of a wider story could impact a manager negatively is around fund set-up costs. “If a manager went to the effort of using a highly regulated structure, which was put in place to provide investors with the greatest levels of protections, this could be misread as overspending,” says Bryant.
Carry calculation metrics throw up another area for confusion. Where assets are unrealised and sensitive, or proprietary information forms part of the calculations, managers will be understandably unwilling to reveal all.
For individuals tasked with the completion of reporting templates, technological solutions to automate the work are now a must-have. “The catalyst for all of this will be technology,” says Jolly. “We are moving away from paper reporting and more and more LPs want to be digital, which almost forces a standardisation of data. Moving from narratives to data-driven reporting is happening with automation.”
For Bryant, automated reporting is a key feature for today’s service provider offering. “For managers wanting to deliver two different templates such as standard ILPA and the CTI, this needs to be fully automated. Our system enables electronic tagging for each expense item so they can easily be reported on, in a variety of ways.”
While automation is an important development for improving reporting standards, it may not be the panacea the industry is seeking. “Producing the information is one thing, but for the investors it’s then about digesting that data and using it for comparisons. For managers, the information can certainly be provided, but the explanations and context around that information will be time consuming,” says Bryant.
According to Neil Harding, Director, Fund Investor Relations at 3i: “The CTI template does try to put the numbers in some context, but it focuses exclusively on the costs associated with the fund. The link to returns is limited to disclosure of the gross and net IRR, not to the aggregate profit on the investment. For LPs to see the whole picture and assess the risk / reward balance on their investment, they need to look further at the full suite of reports provided by the GP.”
For Harding, the cost data only tells one part of the story: “It requires an intelligent interpretation to put it into context.”
While automation can support managers in efficiently producing reports, the time saved will need to be spent on providing a more holistic narrative. And it is for this reason that the move towards standardised reporting must be done with care: after all, a little knowledge is a dangerous thing.
This article was made possible thanks to the support of Highvern.