Private Equity Fee Template ‘Builds Steam’

Nearly a year after its debut, the Institutional Limited Partners Association’s (ILPA) fee reporting template is showing signs of entrenchment within the private equity industry.

The template—an effort to drive uniformity and clarity in fee reporting practices—has made “significant progress” since it was released in January 2016, the ILPA has said, with adoption growing among both limited partners (LPs) and general partners (GPs).

As of November of last year, the ILPA said more than 125 member organizations had indicated they would use the template in negotiations with GPs over new fund commitments. A further 56 allocators and nine private equity managers had also publicly endorsed the template at that time, including the California Public Employees’ Retirement System, the Florida State Board of Administration, Apollo, and Blackstone.

And the list keeps growing, with private equity firm Searchlight Capital endorsing the template just last week.

For more stories like this, sign up for the CIO Alert newsletter. 

“We are pleased to adopt the ILPA fee reporting template,” founding partner Erol Uzumeri told Private Equity News in an interview published on Searchlight’s website. “We feel that transparency is an important part of the relationship between GPs and LPs, and we are committed to providing our investors comprehensive information that facilitates their monitoring activities.”

On Wednesday, Citco—a financial services company serving private equity firms—launched an automated reporting system specifically intended to help GPs comply with the ILPA’s fee disclosure requirements.

“Citco has a long-standing reputation for promoting more uniform and transparent reporting practices in the industry,” said Nick Perros, the firm’s head of private equity and real estate services. “The ILPA fee reporting tool makes it easier and more efficient for our clients to adhere to new transparency requirements.”

In a statement made in November, ILPA CEO Peter Freire said continued adoption of the template was “critically important” in the industry’s evolution toward “greater disclosure and transparency.”

“As the initiative builds a real head of steam with support from all corners of the asset class,” he said, “we are on the cusp of meaningful change that is in the long term best interests of all industry participants.”

Only a small percentage of the world’s 11,000 hedge funds merit institutional capital, says Cambridge Associates—but the few good ones still bring “real value.”

Don’t dump your entire hedge fund portfolio just yet.

Despite recent poor performance and high-profile divestments of the much-maligned alternative managers, hedge funds can still provide “real value” as a hedge against market fluctuations, Cambridge Associates has argued.

“There is no doubt that hedge funds have provided a counterweight to equity and bond investments in a portfolio,” said Trudi Boardman, a senior investment director at the consulting firm’s London office.

According to Cambridge Associates, some investors have “lost sight of the role that hedge funds are meant to play in an investment portfolio—as a protector against downside risk.” This “forgotten benefit” will prove useful as “political and other shocks… exacerbate an already challenging situation for many pension schemes, which are facing a widening funding gap as a result of persistently low interest rates,” the consultant said.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“We’ve been executing alternative investment programs within institutional portfolios for more than 30 years and have witnessed the value that hedge funds have brought to investors who have maintained a long-term mindset and an ability to weather various market cycles, including periods of underperformance,” Boardman said.

During previous market crashes, hedge fund investments have helped institutional investors limit their losses, the consultant found. For example, in September 2002, when the MSCI All Country World Index fell by 12.5%, a portfolio with a 20% allocation to hedge funds only lost 4.6%, compared to the 6.9% loss suffered by a traditional 60/40 portfolio.

“Capital preservation during bear markets enables low beta-high alpha hedge funds to capture the long-term benefits of compounding returns,” said Managing Director Joseph Marenda. “Strategies that may appear volatile in isolation, such as managed futures and global macro, can be strong diversifiers in the context of a traditional scheme portfolio due to their zero-to-low correlation with traditional asset classes.”

There is, however, one catch: only a small number of hedge fund managers actually get the job done, according to Cambridge Associates. The consultant recommends just 250—about 2%—of the world’s nearly 11,000 hedge funds.

“Performance dispersion across hedge funds is larger compared to traditional asset classes,” Boardman said. “Therefore manager selection (only paying high fees to those who can really generate alpha) is critical.”