Demanding a tighter ship

LPs are calling for improved governance structures within funds, including better transparency on fees and performance calculations, according to data from Vistra.

Private equity seems to have a governance problem, and investors are speaking up about it.

In a recent Vistra survey of 50 global LPs, not a single investor said they were satisfied with current practices around fee transparency, the use of co-investment agreements and other governance issues in private fund management.

A panel discussing the results at the ALFI private equity real estate conference in November emphasized the need to balance governance expectations from investors in a practical way, noting the importance of a fund’s limited partner advisory committee and possible changes in scope to an LPAC’s role.

The survey found that 100 percent of investors required an LPAC to be in place before considering allocating to a fund. However, panelists expressed skepticism at the notion that LPACs would ever become an institutionalized governance element in private equity.

“LPACs will remain ad hoc because LPs are sensitive about their liability and LP status,” said Frédérique Lifrange, a partner at law firm Elvinger Hoss Prussen. “They don’t want to be liable for management decisions. As lawyers, we see that reflected when drafting fund documentation.”

LPs are also acting to preserve their individual interests and make clear they do not represent the LPs collectively in a fund, said Lifrange.

But while investors all agreed they were dissatisfied with the current system, they were not so united in their opinion on how to resolve it, said Jerome Wittamer, founding partner at Expon Capital and president of the Luxembourg Private Equity & Venture Capital Association.

“Some LPs want the application of every rule, and some are happy to just tick the boxes,” he said.

The panel also discussed how an increase in co-investment deals by LPs has complicated fund governance, with the level of conflicts of interest risk rising significantly.

“Governance, especially to do with conflicts, is really an issue of potential conflict,” said Wittamer. “Ultimately you can’t avoid them, so you better have a good rule-book on how to address them.”

Co-investments can be distracting from a governance perspective, since they slow fund administration, he said. “LPs are often not structured to take decisions swiftly.”

On outsourcing of fund administration, Vistra’s data show a sizeable proportion of GPs interviewed, 83 percent, outsource their administration to a third party. Of those who do not outsource, 39 percent said they were considering outsourcing some administration in the future.

Some managers have turned to outsourcing as a means of responding to mounting regulatory pressure, said Jan Vanhoutte, managing director and conducting officer of Vistra’s AIFM business in Luxembourg.

“Regulators themselves aren’t driving outsourcing necessarily, but they like it because it brings standardization and consistency to industry practice,” said Vanhoutte. n