The fee debate takes another turn

On Friday, Fortune’s Dan Primack wrote a tantalizing piece on CalPERS' inability to disclose how much carry its private equity managers receive. As far as criticisms go, this one landed a punch square on the nose. CalPERS argues that carry dollars are hidden in the overall returns. Primack accurately countered that CalPERS (like all LPs) receives annual audited financial statements that – with a little reverse engineering – include information on carry.

Even more interesting was CalPERS' framing of the debate as an industry-wide matter. Without any standardization on fee reporting, no one LP can take on the issue alone, the pension seems to feel. It’s an odd line of defense in that CalPERS – a $300 billion system with plenty of pull – could simply ask GPs for the data.  However we may be able to shed some light on the pension system’s thinking here.

Pfm has exclusively learned that the Institutional Limited Partners Association (ILPA) is planning to take a hard look at its reporting templates later this summer with the primary aim of reviewing the sections on fees and expenses. In light of recent SEC scrutiny – and also the controversies plaguing its public pension members like CalPERS – ILPA wants to explore if the reporting templates are in need of an update around fees, sources close to the process say. Our guess is that CalPERS, an influential member of ILPA, is aware of the initiative and wants the association to solve its fee problem at an industry-wide level.

And ILPA isn’t the only trade organization undergoing this type of review. Amidst all the recent noise around fees, the European Private Equity and Venture Capital Association (EVCA) is updating its own reporting guidelines to account for regulatory changes like the Alternative Investment Fund Managers Directive and other topical issues like ESG reporting. With a plan to finalize the update by October (expect a consultation launch in the meantime), EVCA is in talks with ILPA to ensure some level of synchronicity between its own guidance and ILPA’s templates.

The two projects taken together are sure to intensify the debate around fees. ILPA, which predominantly represents LP interests, and EVCA, which is better represented by GPs but has an equal balance of GPs and LPs on its Professional Standards Committee, may run into some disagreements about which fees should be disclosed and how – although sources say the two organisations have a strong working relationship and are collaborating closely on updating the reporting guidelines. ILPA is likely to favor a prescriptive approach, one involving GPs disclosing all expenses, paving the way for CalPERS and others to standardize and benchmark the various fees charged by private fund managers. Meanwhile EVCA will be inclined to consider the administrative and cost burden of itemizing expenses as well as the problem of how any one template could account for all the various fund types (and sizes) that charge different fees in different ways. As these debates take place, running in the background will be stories like a recent NYT Times article that accuses GPs of shifting third-party legal fees at the expense of investors.

In the end, it’s hard to gauge how much the two initiatives will move the needle on fee negotiations and related practices. But as strong advocates of transparency, we see it as a good thing that the conversation is taking place. There's a clear need for change, and it couldn’t happen soon enough.