Pension funds and other institutional investors are pushing private equity firms to provide more standardized reporting on fees and investment performance. This reflects a long-standing frustration over inconsistent and opaque disclosures in the private equity sector. The Institutional Limited Partners Association (ILPA), a trade group representing pension plans such as the California Public Employees’ Retirement System and the State of Wisconsin Investment Board, recently proposed new guidelines.
These guidelines aim to improve transparency by standardizing how firms report financial performance and fees. “I’m a big believer that sunshine is the best disinfectant,” said Scott Ramsower, head of private-equity funds at the Teachers Retirement System of Texas. “We can then have much more detailed conversations with our private-equity partners and hopefully be putting pressure on them to really be thoughtful.”
The push for greater transparency comes as private-equity assets under management have tripled over the past decade, with fees rising at twice that rate, according to data from Preqin.
The fee growth has been fueled in part by fund managers using subscription lines and net-asset-value loans to enhance short-term returns, consequently raising the fees they collect. Critics say such strategies can mask performance, making it harder for investors to distinguish top-performing managers from those relying on financial engineering.
Greater transparency with standardized reporting
Slumping returns last year have also pushed US pensions and endowments to demand more clarity. David Parrish, a lawyer at DLA Piper who advises private-equity investors, said the lack of standardized disclosures disproportionately hurts smaller investors. “There’s no justification for the private-equity community to tell someone, ‘I only give that information to my large investors,'” Parrish stated.
While some PE firms have adopted a fee and performance template proposed by ILPA in 2016, roughly half of the market has not, creating a fragmented landscape for pensions seeking consistent data. Although the Gary Gensler-led Securities and Exchange Commission attempted to require quarterly reporting on fees and expenses with new rules in 2023, smaller pension funds continue to face significant hurdles. Preqin data show that while larger investors have successfully negotiated lower fees, smaller pensions continue to pay a standard 2 percent management fee, further widening the gap between large and small investors in their ability to access and compare fund performance.
However, representatives from PE firms maintain that they already provide sufficient information to support investors’ decision-making. Private-equity firms work every day to ensure investors have the information they need to make the best investment decisions for retirees across America,” said Drew Mahoney, chief executive of the American Investment Council.