LPs looking for guidance on how to validate private equity fees have received some help through a new white paper from industry expert Colmore.
Transparency over fees and expenses has been a major talking point across the industry for years, and was thrown into especially sharp relief in the wake of the SEC’s then-OCIE director Andrew Bowden’s famous “Sunshine Speech” from 2014.
That speech highlighted widespread issues with fees and expenses within the industry, including poor disclosure practices, shifting of expenses to funds and taking liberties with valuations.
Three years on, and LPs are still trying to nail down the accuracy of some of their private equity charges.
Only last week Buyouts reported that the $52.5bn-managing Los Angeles County Employees Retirement System had been overcharged by more than 40 per cent of its fund commitments on carried interest.
And it is not just large US pension funds which need to get a closer grip on their fee transparency according to Colmore’s white paper – but the prohibitive costing of a full-fee validation programme was often putting off LPs with smaller portfolios from undertaking fee remodeling.
The report, authored by commercial director Alex Tarantino (pictured), said programmes providing fee due-diligence on an ongoing basis, based on existing documentation submitted by GPs, were actually more cost effective while being less intrusive and more efficient than full remodeling programs, and thus more accessible by smaller allocators.
Colmore says this strategy overcomes some of the drawbacks of a full fee remodeling, which aims to recalculate all the historical fees from a sampling of current funds, and requires the GP to submit all transactional details.
It said, “This methodology has the GP provide a full history of cash flows and transactions, so that the LP can re-examine, re-construct and re-calculate all historical cash flows, NAVs and waterfall processes.
“To say this is an extremely expensive and time consuming proposition is an understatement.”
It said the ongoing fee due-diligence programme was instead based on existing reporting between GP and LP, such as capital account statements, cashflows and ILPA fee templates, so there is no intrusive ‘ask’ of the manager.
The white paper also covers the importance of having the proper analytics and experience in handling the vast amounts of data involved in a fee remodeling, with the goal to distill only the most relevant information for analysis without wasting time and effort where fee compliance for a fund is not deemed an issue.
The full white paper is available on the Colmore website here.
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