Con-templating the future

Private equity firms in the UK were dealt a blow when the country’s regulator said they would have to use a standardized template to report their fees and charges to investors like other asset managers. That template, however, is not yet in place; a working group appointed by the Financial Conduct Authority will be responsible for drafting it and industry bodies including the British Venture Capital Association are expected to be involved.

The reform is part of a transparency drive triggered by the FCA’s two-year review of the asset management industry. Alternative assets were initially excluded from its scope, but retail managers complained the sector was “particularly opaque.”

One size fits all?
In essence, a version of the Institutional Limited Partner Association’s template on fees and expenses will be made compulsory. It makes sense on paper; a template allows general partners grappling with reporting requirements to plug numbers into specified categories and produces an investor report that presents an extensive range of data in a known format.

But ILPA’s template, issued in 2016, has gained limited traction. Just 12 percent of delegates polled at this year’s Private Equity International CFOs & CCOs forum said they had adopted it, with more than one-third saying they have no plans to do so. Others are using aspects of the template, but adapting it to their own specifications.

Uptake has been limited by a number of factors. For smaller firms, implementing the template is just too big a task. Other fund managers say investor demand for data is so individual it is difficult to standardize. Some investors even require more data than the template, and in their own formats.

As one lawyer pointed out, it’s important to strike the right balance between complexity and transparency when it comes to reporting; a GP shouldn’t have to spend time preparing reams of data for an LP that neither understands or requires it.

But GPs do believe the template has at least provided a benchmark for transparency, and this is at the heart of what the FCA is trying to achieve with its new regulation.

UK firms should learn from the experience of their US peers, and use this knowledge to their advantage. They may not be able to escape this regulatory requirement, but they will have a chance to shape its outcome. That is not an opportunity they should pass up.