The Changing LP-GP Relationship

By Alex Tarantino

People shaking hands

Institutional investors are increasingly unhappy with high/opaque fees at private equity firms; some are taking their asset management in-house, while others are co-investing (i.e. LPs and GPs invest in companies alongside each other). Both approaches save money and provide superior returns and enhanced control over investment decisions.

While investing in a lucrative deal can lead to heightened returns, exposure to underperforming/failed corporate transactions has a downside. Direct investment can lead to accidental conflicts of interest and the risk incurred through increased concentration by direct/co-investment can cause serious losses. Institutions with skilled in-house/co-investment teams are more likely to succeed than smaller investors that try direct investing or co-investing without the required skillsets.

Opaque fee structures are an issue for many investors, who complain about private equity firms over-charging, passing on erroneous expenses, or not addressing conflicts of interest. In response, the Securities and Exchange Commission (SEC) is reviewing fee structures and policies and several private equity managers have settled with the SEC in relation to their fee practices. Some US state governments are considering forcing private equity firms to report their performance fees to public sector investors.

The industry is moving toward increased fee transparency. The International Limited Partners Association (ILPA) has instituted its Fee Transparency Initiative, a harmonized reporting template that identifies fees, expenses, and incentive allocations. While private equity managers are often unique, and a template-based reporting model may not work for some, many managers are speaking to service providers about how to adhere to the Fee Transparency Initiative. There’s also the AltExchange initiative, a data standard that enables managers to produce a consolidated information pack for LPs in an AltExchange or ILPA format. As bespoke investor reporting becomes more common, it’s creating challenges for private equity managers. Streamlining all of these data sets into a standardized format saves time and energy so managers can focus on producing alpha for clients.

To curtail private equity fees and boost return profiles, investors are embracing direct/co-investment models. Others are exploring ILPA and AltExchange transparency templates to improve private equity disclosure. SS&C, a member of the AltExchange Alliance, provides the global private equity industry with a broad range of highly specialized solutions that promote operational excellence. With our industry-leading private equity service and software, we offer many flexible options to meet ILPA mandates and standards. Our suite of ILPA-compliant reports efficiently satisfies the most demanding LP reporting requests, leaving time and bandwidth for more pressing concerns.

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