Industry best practices for improving transparency for limited partner fund fees

By Lorelei Graye

The fees paid to investment managers are under scrutiny.  Recent events, like California’s fee transparency bill and Congress’s evaluation of private college endowments, are focusing more attention on fees investment managers receive for the funds they manage.  Many Limited Partners (LPs) are assessing methods to collect accurate and consistent fee data including carried interest across their private equity portfolios.

Collecting Fee Data

For LP’s, the first step to improving fee transparency is to gather consistent LP-centric fee data from each of their investments.  Certain processes can be implemented to improve the data collection phase such as:

  • Maintaining a complete population of funds held for the fiscal period
  • Maintaining a matrix of data by fund and category of fee
  • Making a decision with the auditors to enhance the audit confirmation process for collecting fee data

Validating Fee Data

The next step toward greater fee transparency is validating the collected fee data.  Fee validation is viewed as a prudent measure by fiduciaries to gain assurance around LPA compliance.  The validation process is designed to catch reporting or data capture anomalies, identify errors in the collection phase, and normally includes the re‐calculation of management fees and incentive allocations.

Reporting on Fee Data

The final step in the fee transparency journey is reporting on the data.  Some LPs consider taking a transitional approach by preparing for internal fee transparency reporting by positioning their data collection process.  Additional considerations may be made when determining if an in‐house solution should be built versus the use of an outsourced solution.

Due to the importance of error-free fee data, the collection and validation processes should be implemented in a highly‐controlled environment.  If implemented internally, staff should be sufficiently trained and have experience with carried interest provisions and the related waterfall calculations.  When using an outside vendor to perform these tasks, it is prudent to ensure that their team is similarly experienced and that their process is covered by their annual SOC‐1 audit.

To learn more about improving transparency for limited partner fund fees, check out our latest white paper, Industry best practices in fee transparency: Limited partner collection and validation of fund fees.

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