Impacts on managing private equity funds in an era of increased complexity

By Bocar Kante

The private equity fund industry has raised over $300B in committed capital every year for the last four years—and 2016 proved to be the best fundraising year since the financial crisis[1]. This may even cause Assets under Management (AuM) to double within the next five years[2] off the back of institutional inflows. As fiduciaries to institutional money, private equity is facing pressure to reform its operating model and raise standards.

Preparing for Change

The way that non-headline fees – such as transaction and portfolio company monitoring fees – have been levied on limited partners (LPs) in the past has never been totally translucent. That the Securities and Exchange Commission (SEC) saw it fit to fine several private equity managers for poor fee disclosure practices naturally stirred LPs to start asking more incisive questions about what and how fees are calculated and apportioned. Industry-wide reporting standardisation of fees, expenses, and carried interest has progressed with the Institutional Limited Partners (ILPA) fee reporting template. Many LPs are also requesting – or requiring in some cases – that any fund that they invest in uses an independent third party administrator to help ensure transparency and compliance to the ILPA fee standards.  If fees are not carefully and clearly outlined to would-be clients, fund-raising will be painstakingly difficult.

Requests for additional reporting and disclosure is a new cost-centre for private equity, but their choice and flexibility on this matter is restricted. While LPs are committing more capital, those allocations are going to fewer General Partners (GPs) than what was the case before the financial crisis, according to a survey by Palico[3]. Operational due diligence on GPs is highly scrupulous nowadays and meticulous data analysis is incorporated into the fund selection process. This is more than just a review of performance measures such as the Internal Rate of Return (IRR) or Multiple of Invested Capital (MOIC) but a deep dive into the Public Market Equivalent (PME) as a means to compare private equity to public market indices. As highlighted by eVestment in their industry survey “Private Equity Limited Partner Due Diligence Trends 2016”[4], more LPs are recalculating GPs’ past performance figures as part of their due diligence process.

Private equity reporting used to be fairly undemanding, but managers now have to factor in that regulators and investors both want more information about their businesses. GPs who are not attuned to the data and reporting requirements of LPs are bound to miss significant fundraising opportunities and ultimately risk eroding their asset base. Equally, those GPs who fail to meet regulatory reporting deadlines or whose disclosures are piecemeal or erroneous may find themselves being called up for non-compliance. GPs need to adapt to the evolving and increasing complexities of managing private equity funds. They must continue to invest in and to innovate their governance and reporting environment to be successful. As a result GPs are spending more time on operational and regulatory matters at the expense of core competencies: applying their investment expertise to add value for their LPs. It is increasingly essential for GPs to partner with a specialist, independent fund administrator with the experience and scalable infrastructure to mitigate the impacts of managing private equity funds in an era of increased complexity.

For further information about the challenges facing the private equity world, read our white paper – Impacts on Managing Private Equity Funds in an Era of Increased Complexity.


[1] Source: Preqin

[2] Antoine Drean: “Ten Predictions for Private Equity in 2016”

[3] Global Private Equity Compass Summer 2016

[4] Industry Survey – Private Equity Limited Partner Due Diligence Trends 2016

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