May 27, 2016
Interviewed by: David Snow
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ILPA’s Focus on Fees

The ILPA, whose members control nearly half of all capital in the private equity industry, has issued new standards on fee transparency. Privcap speaks with ILPA CEO Peter Freire about the demand for better fee disclosure, the frustrations now felt by GPs and LPs alike, and why the Limited Partnership Agreement may be the next document in need of standardization.

The ILPA, whose members control nearly half of all capital in the private equity industry, has issued new standards on fee transparency. Privcap speaks with ILPA CEO Peter Freire about the demand for better fee disclosure, the frustrations now felt by GPs and LPs alike, and why the Limited Partnership Agreement may be the next document in need of standardization.

ILPA’s Focus on Fees
With Peter Freire of the Institutional Limited Partners Association

David Snow, Privcap: Today we’re joined by Peter Freire of the Institutional Limited Partners Association. Peter, welcome to Privcap. Thanks for being here.

Peter Freire, Institutional Limited Partners Association: Thank you very much.

Snow: So, Peter, you’ve been in your role as CEO of the ILPA for about a year. Maybe before we get into some of the really interesting issues that you guys are tackling, you can talk a bit about what was it that attracted you to the opportunity to run ILPA.

Freire: The ILPA touches trillions of dollars of assets, it’s meaningful in the lives of beneficiaries the world over, and when you look at the GP-LP relationship, I think the LP is considered a little bit of the underdog in that. So it’s personally interesting to me to represent the group that could benefit most from representation, and I see a huge opportunity to be a more forceful, impactful global player.

Snow: One of the most recent, I guess, initiatives that you unveiled was a new fee reporting template, which, of course, touches on the very electric issue of fees in private equity. Before we get into how it’s been received, paint the background for why it was necessary, and why you felt it was important to come up with a fee template.

Freire: Fees and the whole question of what are they, are the fees that are being charged correct relative to the ILPA, has been an issue that’s been out there for a long time. It’s been widely reported on, the SEC have made comments on it, GPs and LPs have spoken about it, and we felt it very appropriate for us as a pan-industry body to come and see if we could bring GPs and LPs together to create more transparency and see if there could be an agreed template that everybody said these are the correct way of reporting numbers, so that LPs and GPs could actually achieve some efficiencies in their roles.

Rather than deal with a very specific bespoke templates, which is the history of our industry, actually have a single, common standard. And when you think about other industries, and you think about financial reporting and GAAP, the idea of standards that are agreed by the industry is actually quite normal. And so I think it’s something whose time has come for the industry, so really is just the end of a long, simmering and growing sense that we need to do that. We’re a mature industry. This is our time.

Snow: Was there a level of, I guess, frustration among LPs that they didn’t have better and more information on the subject of fees?

Freire: Sure. I’d say there’s some element of frustration for both GPs and LPs. I mean, for an LP if every LPA is structured slightly differently and there are different fees, different expenses, it’s very hard for an LP to do their job to compare managers to other managers, different funds to other funds, look at the returns relative to fees, compare the fees to other asset classes. So you can imagine, for a relatively under-resourced LP, and many of them are quite small, it’s a lot of work. And anything that’s standardized, it makes comparisons and evaluations between parties over time between asset classes, has to be a good thing.

But for the GPs you can imagine what it’s like to have to report using a different template to every single LP. It’s a lot of work for them. So I think it’s one of these places where everybody can gain from a standardized template. And it reduces the likelihood or the chance of there being mistakes. And there are mistakes that are made in any industry where you have a lot of numbers going back and forth. There can be mistakes. [00:05:54] And if you have a standardized report it eliminates the chance that that might happen.

Snow: There’s mistakes and there’s also been fines…

Freire: There have.

Snow: …that have been levied against GPs who, I guess, mixed up which entity to charge a few to.

Freire: Yeah, and then obviously, not my place to say what happened in those situations, the SEC made those decisions they did, but it’s clear where you have different reporting standards and different LPAs with different fees, mistakes can happen, whether they’re intentional or not.

Snow: So for a GP to adopt your new fee reporting template, how much would change within their organization? Would it be…? Would they have to bring on more people? Would they have to outsource it? Or do you see it as just more of a process change?

Freire: Sort of all of the above. I mean, in truth, it sort of depends on the resources the GP has. I mean, I don’t want to minimize it, this is real work for GPs, so if you’re a big, a larger GP, with a back room and the operations staff and the technology skills to rewrite software and reorganize processes, it’s expensive, but you can do it. And where you have a lot of relationships out there that you can amortize these costs, it makes sense, which is why some of the early supporters if the template on the GP side have been the bigger names out there.

For the more small or more middle market sized GPs, it’s a real expense, and I don’t want to minimize that. I think it’s still the right answer long term, but it is a cost.

Snow: Do you sense that there’s some GPs out there that maybe don’t have a sufficient sense of urgency around this?

Freire: If I were running a GP organization with some of the constrained resources that certainly those in the midmarket size have, I’d be really concerned about the cost, and saying, is this necessary? Is it really going to happen? The last thing I want to do is go down this road, only to find out that the SEC or somebody else is mandating an entirely different standard. So I absolutely understand their caution and trepidation. My view is that because the larger GPs and LPs are signing on, and going to adopt, and have indicated they’re going to adopt it, that will flow across the industry over time.

Snow: Are there other standards that are coming next? Other areas of the LP-GP relationship that you’d like to see more standardized?

Freire: So the places we’re look at now are, one, the LPA. As most in the industry know, those can be quite complex documents; very expensive to create. And we believe, and we have both GPs and LPs who’ve spoken to this, that there are elements that could be standardized, or agreed on, and become, if you will, a boilerplate.

The other thing we want to do is update our principles, the ILPA principles, which would become 3.0, we’re now 2.0. I think widely adopted and certainly spoken of in the industry, but the last time they were updated was 2011, which was pre-Dodd-Frank, pre-AIFMD. So there is work to be done to bring them…to modernize them.

Snow: How many members are in ILPA?

Freire: We have about 350 at the moment, and so I have no idea what the percentage that would be of institutional partners in private equity, probably…The absolute number is still relatively small, but in terms of percentage of assets under management it’s quite significant, probably approaching about half. So as you might expect, the first joiners were all the larger players, but that is changing over time as we move towards smaller LPs and LPs internationally. And obviously well beyond the pension funds, which, when we were founded, were initially a large…a majority of our constituency, but now represent only about a third of our membership.

Snow: Do you have any idea of roughly how much private equity capital is under management by ILPA members?

Freire: It varies day to day, almost, but we’re probably about 1 ½ trillion to 2 trillion in total. So, a lot.

Snow: So if ILPA standards are adopted, there’s quite a weight of capital behind it.

Freire: Absolutely. Absolutely. And, again, I think the reason it’s so important that we have in our membership the leading lights, the biggest players, is naturally their activity and their adoption influences the rest of the industry. And I don’t think private equity is any different from any other industry, that when the big players move in a certain direction those that are not as big tend to follow over time.

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