European Funds Comment: UK Regulator To Endorse New Private Equity Fee Disclosure Template

13 July 2018
Issue 44

In recent years, both investors and regulators have taken an increasingly keen interest in the detail of the fees earned by private equity fund managers, and the expenses that they charge to the fund. Although investor pressure on these issues has been a longstanding feature of fund negotiations, more recently it has become standard for managers to provide investors with line-by-line, itemised reports of fees and expenses – making the position fully transparent. Indeed, in 2016 the Institutional Limited Partner Association (ILPA) issued a detailed template for reporting fees, expenses and carried interest. Although 20 European investors have officially endorsed the ILPA template, some GPs were concerned that it was too rigid, and that some of the terminology didn’t fit with European norms, so chose to follow the updated Invest Europe Reporting Guidelines instead (which require disclosure of substantially the same information).

Of course, regulators have not been silent on this question and, in Europe, the Alternative Investment Fund Managers Directive requires fully authorised managers to make various fee disclosures, both when marketing the fund and in the annual reports that must be made available to investors during the fund’s life. But the market-led disclosures mandated by industry associations are well ahead of those stipulated by the AIFMD, and the market power and collective action of investors has mitigated the need for regulatory intervention.

It was against that backdrop that the UK regulator, the FCA, approached its wide-ranging review of disclosure of costs and charges by UK-regulated firms. Initially it excluded private equity from the scope of this review altogether, but belatedly added it after some institutional investors apparently argued that disclosure could be improved. The FCA established a working group – which included the UK’s private equity trade association, the BVCA – to spearhead its work. Last month, the FCA published a summary of the working group's report and endorsed its recommendations – among which is a proposal for a private equity-specific fee reporting template. The full report, along with that template, will be published in the autumn, but the FCA’s working group was clearly impressed by the work already undertaken within the industry on fee transparency.

Adoption of the template will not be mandatory – at least initially – but it will be encouraged, and the FCA will monitor take up. It is expected that many firms will adopt the template, in part because the group that drafted it was led by the BVCA and supported by industry practitioners (and they used one of the Invest Europe Reporting Guidelines examples as a key point of reference). Importantly, those who already use the ILPA template (also a point of reference for the working group) will not need to complete the FCA-endorsed version – something that the industry argued for, so that GPs do not have to work with multiple templates.

Firms will have to wait until the template is published in the autumn to see the detailed requirements, and the FCA will announce a process for periodic review at the same time. But there seems little doubt that the new template will be influential: some European managers – and, more importantly, their investors – may prefer it to ILPA’s (similar, but more North American-focused) version.