The Institutional Limited Partners Association has teamed up with consultant Colmore for a new membership service to enable institutional investors to validate fees, expenses and carried interest allocations charged by fund managers.
The Fee Allocation Incentive Reporting programme comes on the heels of ILPA’s new template, launched in March, which provides portfolio company metrics to limited partners.
“We are the next step. We take the template data points and turn it into insights for LPs,” Colmore chief executive Ben Cook told sister publication Private Equity International.
Fees are a recognised pain point for investors, and they haven’t been able to find a straightforward way to validate them, Cook said.
Institutional investors, including New Mexico State Investment Council, California State Teachers’ Retirement System and Brunel Pension Partnership, use Colmore for ongoing analysis on fees based on their existing general partner documentation.
The process is straightforward, Cook said. When a GP sends its fee charges to the LP, it simply adds Colmore to the emails. Colmore checks the fees against the limited partnership agreements and other documents, and flags any discrepancies.
Contrary to popular belief, fee validation is not about catching out GPs; rather, it is to affirm that the partnership is delivering returns for everybody, Cook said.
“GPs want to make sure their investors are getting the right level of information,” he said. “Investors have requested, and GPs have delivered, that information.”
However, errors can happen, according to a source who tracks fee validation services.
In one case, the limited partner was classed incorrectly and therefore charged incorrect management fees for years. In another, a GP did an inception-to-date recalculation of fund expenses and charged a catch-up without disclosing it to its LPs, resulting in a significant fee hike for the quarter. In some cases, GPs did not accrue for carry even though they were required to do so by generally accepted accounting principles, thus overstating their net asset values. In several instances, there was a misrepresentation of step-down of management fees, the source said.
Oklahoma Teachers Retirement System found four significant errors in its private market reporting. The pension plan has issued a request for proposals for an outside vendor to help manage ongoing due diligence, monitoring, operational and reporting aspects of its private markets portfolio.
In all the above cases, the errors were acknowledged and rectified by GPs.
ILPA’s templates have seen an increase in uptake among institutional investors seeking more transparency in their private market portfolios, a source familiar with the association said.
Endorsers of the ILPA template include the two Pennsylvania pension systems, California Public Employees’ Retirement System, Teacher Retirement System of Texas, Oregon State Treasury, Canada Pension Plan Investment Board and Montana Board of Investments.