Ineffective GP-LP reporting ‘hurts’ private equity

Ineffective private equity reporting could be preventing new investors from embracing the asset class wholesale, a conference has heard.

Some large institutional investors are struggling to integrate private equity with their portfolios due to transparency issues, Elias Korosis, partner at London-based fund of funds Hermes GPE, said in a panel discussing the GP-LP reporting relationship at the British Private Equity and Venture Capital Association’s annual conference on Thursday.

A lack of clarity over the underlying risk metrics has left some investors uncertain over which bucket they should allocate from.

“That’s really hurting the asset class,” Korosis said.

Many institutional investors around the world who have long-term investing horizons do not have sizeable allocations to private equity because it is too much “brain damage”, he added.

“There’s a very big gap in what we could be doing as an asset class in helping LPs feel like this is not a pure black box.”

Industry bodies have attempted to address this shortfall. The UK’s Financial Conduct Authority has welcomed recommendations from the Institutional Disclosure Working Group suggesting firms use a set of five templates for standardising and collecting data, as well as arrangements to ensure these are maintained. A full report is expected later this month.

The Institutional Limited Partners Association published a reporting template in 2016 to standardise managers’ approach. Teacher Retirement System of Texas, a $151 billion public pension, helped with the template’s design. Managing director Allen MacDonell was critical of industry adoption during the panel.

“A couple of the larger funds who agreed to it tweaked it from their perspective because they wanted to see other things,” MacDonnell said.

“You thought you had something stable and formalized, [but] within a couple of weeks [GPs] get something from us and something from someone else that’s a completely different information request. You’re a fiduciary for your own participants and have your own requirements; you can’t have a single cookie cutter model that fits everything.”

Neil Harding, fund IR director at UK private equity giant 3i, suggested ILPA’s fee-reporting guidelines were too complex and opaque.

“They did it in a slightly, in my view, cack-handed way,” Harding said.

He also pointed to a lack of cohesion in terms of definitions, with some industry templates referring to France as southern Europe, or the Middle East being included alongside Azerbaijan and Georgia.

Security is another issue potentially obstructing effective reporting by GPs.

“A lot of this information about portfolio companies is very sensitive, so I won’t send that report to a back-office administrator if I don’t know who’s opening that,” Harding added. “The damage you could do with some information about a portfolio company, if that information got out to the wrong hands, could be quite material.”