Gareth Davies, Augentius

FCA backs increased cost disclosure for private equity

By Gareth Davies, Augentius – For the private equity industry, transparency has become the watchword: everyone wants more granular data, more often. For a number of years demands from investors have called for a deeper understanding of valuations and the reasoning behind them. It is an age-old challenge for LP-GP relationships, but one that is expected to change significantly over the next few months.

Last year investor demands began to be addressed with the formation of the Institutional Disclosure Working Group (IDWG) which was set up to support a more unified approach to reporting. The outcome was five proposed templates to standardise reporting, including a specific private equity template, to ensure that investors received the information they needed to make effective decisions.

Currently these proposed templates are voluntary with no regulatory requirements attached, but managers cannot afford to mistake their significance. Although they have been positioned as ‘recommendations’ the FCA will reconsider this if there is a poor uptake from fund managers. And the heat won’t just be coming from the regulators over the coming months. Alongside the proposed templates will come significant pressure from investors for compliance and managers need to take notice.

Investors have been encouraged by the IDWG to pressure managers with methods such as removing funds from proposal requests and refusing renewal of contracts if they fail to comply. This means if managers are unwilling to use an IDWG or the alternative recommendation for reporting standardisation such as the ILPA template, they risk damaging investor relationships and in worst case scenarios, losing business.

Also supporting investors will be the UK’s Local Government Pension Scheme (LGPS) who have strongly encouraged the template uptake amongst its members. In fact, it is expected that very soon LGPS investors will insist on this reporting structure from all managers. Given that large numbers of private equity funds currently have LGPS investors, a segment of the industry will be affected by these changes over the next few months.

And that’s not where it ends. The FCA has now announced the creation of the Cost Transparency Initiative (CTI). The successor group will push forward the work already undertaken by the IDWG and support investors further to ensure the suggested cost disclosures are carried out.

It’s a big shake up, with high stakes and many managers are turning to professionals in the industry for assistance. To protect investor relations, managers must understand how to approach the IDWG templates, in order to create greater transparency and avoid any fall out.

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