Customer complaints

The move by more and more private equity firms to appoint a designated, in-house investor relations executive underscores the growing need for general partners to better control the message they send to their investors.
And “control” is the right word – because the market is flush with funds for private equity investing, the best GPs get to choose their limited partners, their fees, and the way they communicate with their LPs. The obligations GPs have to the LPs are spelled out in limited partnership agreements. But with no regulatory body overseeing the industry, GP reporting is all over the map, complain LPs.
Where GPs are obliged to communicate with their LPs is through quarterly, semi-annual and annual reports, annual meetings, and any other communication should there be an event that would affect a material change in the fund or its underlying portfolio.
LPs say that GP investor reporting has improved over the years and is now mostly satisfactory. But LPs bemoan the lack of overall standards and transparency in investor reporting, as well as problems with timeliness.
Attempts to create standardization across the private equity industry in the US have failed time and again, and a new effort by an industry body to promote a standard reporting format has been met with more criticism and apathy than cheers. In Europe, where industry bodies have set guidelines for valuations, there is as yet no standard format of reporting these values. But the LPs of European private equity firms are, in general, happier to see some – any – standard applied to these reports.
Despite investor gripes, what keeps LPs coming back for more has been the profits the GPs have been generating. “At the end of the day, it’s the ultimate return that we’re looking for,” says John Gripton, head of investment management in Europe at Capital Dynamics, a Switzerland-based private equity advisor. “If we are getting superb returns from the manager, and the information doesn’t give us 100 percent of what we’re looking for, but gives us 95 percent, then we would have a discussion and try to get the other five percent.”

Zero standards
“I think one of the biggest issues in private equity reporting is there is no uniform standard in terms of content or format,” says Allen Williams, vice president of reporting at Philadelphia-based investment advisor Hamilton Lane. “If there were some uniformity in the way general partners are required to report, we could knock out the number one issue I have with financial reporting.”
Other LPs agree. “There is zero standardization in information reporting across GPs. Zero,” laughs Michael Hoffman, president and partner of San Francisco-based private equity advisor Probitas Partners.
The probability of reaching an industry-wide agreement in investor reporting, short of a regulatory push, is also likely zero. The British and European private equity and venture capital associations, the BVCA and EVCA, have set guidelines for reporting valuations for their members, but these merely provide guidance; compliance is not mandatory.
Gripton, who has more than 20 years of LP experience, chiefly in Europe, says he wishes there was a more standard format for reporting. He says that different GPs often disclose the same types of information, but “you have to understand how each manager reports.”
In the US, a number of attempts at standardization over the past two decades have failed. Notably, there is no official industry body.
One voluntary and self-described “temporary” body, the Private Equity Industry Guidelines Group, is working on setting standards in valuing portfolio companies and in reporting format (see boxed article).
A random survey of reporting formats among three GP groups illustrates this lack of standardized reporting format. First off, New York private equity firm Elevation Partners sends a business-oriented performance report that presents how portfolio companies are doing. Meanwhile, Seattle-based Frazier Healthcare Ventures only reports on its performance at the fund level. Then there’s Santa Monica, California technology fund Rustic Canyon Partners, which includes a narrative and relevant news on the fund’s portfolio companies, with reports often running 150 to 200 pages, a majority of that being clips from the press on the portfolio companies.
In private equity reporting, it might be said that the only true standard is in the realm of taxes, such as the K-1, a form mandated by the IRS in reporting partnership income.
It’s not hard to understand why many GPs have been resistant to the creation of reporting standards. Doing so would remove one more point of negotiation in the partnership agreement. “There is some growing level of efficiency where better performers on the private equity side get better terms,” says Hoffmann. “Standardizing terms across funds in some respects continues to penalize the outperformers and benefits the underperformers.”

How transparent?
GPs uniformly disclose information about their funds’ performances. What information is disclosed, however, is subject to each GP’s volition. “The only legal obligation is to send out these reports – that’s in the limited partnership agreement,” says Kevin Albert, managing director at Elevation Partners. “In most circumstances, it doesn’t specify the level of detail you need to go into.”
As GPs have no obligations about the level of detail required for disclosure, LPs complain that some GPs are not as forthcoming about the information they report to investors. Ultimately, many do provide further details to inquisitive LPs, often after some amount of pestering. “It’s not as if they won’t give the information to us. We have to follow up with calls and emails, and that causes delays,” says Hamilton Lane’s Williams. (Due to open-records requests, many GPs have in fact been disclosing less information. See p. 30).
In general, there is a regional difference with regard to the quality of investor reports. Reports coming out of GPs in Europe, where valuation guidelines have been set by the BVCA and EVCA, tend to be more comprehensive, says Williams. Hamilton Lane frequently gets the information it typically looks for from European GPs, such as realizations and portfolio company data including market value, cost and company descriptions. But Williams can’t say the same for US GPs.
What information is disclosed depends on the GP’s attitude towards disclosure, and their relationship with LPs. In Elevation Partners’s quarterly reports, for example, Albert says, “We try and help our investors understand how the companies are doing based on our honest assessment, and investors seem to appreciate that more than giving them additional volumes of information.”
Reporting is particularly dicey for venture capital-oriented firms, although GPs say they try to be as transparent as possible. “We typically don’t get into proprietary information,” says Bridget Rauvola, senior vice president of marketing and investor relations at Frazier Healthcare Ventures. “We try our best to allow our companies to be as competitive as possible in the marketplace. We won’t discuss developments that would jeopardize the success of our investments.”
Despite calls for more transparency, how much information really needs to be disclosed? Not as much as one may be led to believe. “The need for full transparency about portfolio companies during the investment period is actually pretty limited,” says Hoffmann. “More detailed information about the performance of portfolio companies becomes important at the time you’re evaluating that fund for making an investment in their subsequent fund.”

‘When is it coming out?’
Another aspect of reporting upon which GPs and LPs must mutually agree is timing. Legally, GPs must send quarterly reports to investors within 45 days of the end of the quarter and annual reports within 90 days after the end of the fiscal year, or whichever designated period both parties agree upon at the beginning of their relationship.
But it is the industry’s worst kept secret that GPs are notoriously late in sending out tax information to LPs. In the US, where the tax filing deadline is April 15, some GPs do not mail tax information until May or June. As Albert says: “[Because our quarterly reports are pretty comprehensive] the only question I get from LPs is, ‘When is it coming out?’”
“Timeliness is always going to be an issue,” says Williams. He estimates that 30 percent or more of GPs Hamilton Lane deals with have problems reporting on time, but understands that the nature of the asset class is that there is and will be a lag in financial reporting. Still, Williams says, “you want to get information as soon as you can after the quarter end.”
Timing of communication also extends to material events at portfolio companies. “The biggest thing LPs dread is surprise,” says Hoffmann. LPs want to hear good news, and especially bad news, quickly and directly. “When a GP fails to give you a heads-up. . . that something might be going sideways with a company. . . that’s a cause for great concern because it then brings into question the overall integrity of the GP’s reporting. If I’m reading about a material event in the press, and I didn’t hear it directly from the GP, we have a problem,” he adds.
For Hoffmann, poor reporting could affect an LP’s decision on whether to continue investing with the GP in question. As an LP, the scope for control is limited. “You can express dissatisfaction and see where it takes you. But ultimately, if that’s the nature of the relationship that the GP chooses to establish, you have to decide in the next fund if you want to perpetuate that relationship,” he says. “For us, it’s an easy call. If there’s not a true information sharing rapport, we have no interest in perpetuating a relationship where we will not be able to trust the nature of communications coming out of the GP.”
Change in GP reporting can come if enough LPs demand for it. But there is little incentive for established GPs to fix what isn’t broken. Hence LPs live with what they are given. “Do people want more? Absolutely. But can they operate under what they already have? Yes. Can they get by on that? Yes. This is a return driven industry. Investors, typically, are not going to forsake a good investment opportunity because of reporting,” says Williams.
Where LPs can exert some power in GP investor reporting is before signing the LPA. “It’s a requirement when we make an investment that the reports provide us with at least the basic information that we need,” says Gripton.
He adds: “The majority of the reports are very good and very detailed, and we’re seeing a continued improvement in the quality of information we’re given.”
GPs say they know what information LPs want and when. They even accommodate LPs who still want paper-based reports, although most have moved to email or web-based reporting. “I think LPs would generally like to know a little bit more about what’s going on,” says Albert. But no matter how much LPs push, without regulations, there is only so much further GPs will bend over to accommodate their investors, especially if they are producing the types of returns that keep LPs happy.