Pension funds are calling for more transparency from private equity firms, seeking clearer and standardised reporting on fees and returns, in new guidelines published by the Institutional Limited Partners Association (ILPA), according to a report by the Wall Street Journal.
The ILPA, a trade group with members that include public pension plans from states like California and Wisconsin, aims to address ongoing frustrations regarding private equity’s transparency.
Since 2018, public pension plans, university endowments, and charitable foundations have increased their investments in private equity by nearly 100%, according to data from Preqin, a provider of private fund analytics. These institutions, among the largest and most loyal clients of private equity, now represent a significant portion of the $4tn in assets managed by North American private equity firms.
For years, pension funds have relied on private equity to help fill budget gaps, often tolerating limited transparency in exchange for higher returns. However, there is now a growing demand for more detailed and consistent reporting on investments.
Private equity firms tend to disclose varying amounts of information based on the size of the investment, meaning smaller investors often receive less data. This lack of consistency has left smaller pensions in the dark, while even larger funds struggle to effectively compare performance across different managers.
The Texas Teachers, California Public Employees’ Retirement System, and the State of Wisconsin Investment Board are among the steering committee members of the initiative, with firms like Vista Equity Partners and Cerberus Capital Management representing the buyout industry.
While some private equity firms support the proposal, there are hurdles to its widespread adoption, as demand for top funds often exceeds supply, giving private equity firms more leverage during negotiations.
Private equity assets have tripled over the past decade, but the fees charged by these firms have grown sixfold, according to Preqin.
Large pension funds, such as Texas Teachers, are able to secure detailed performance data from private equity firms, but the process is often cumbersome and time-consuming, as each manager provides the information in different formats. Smaller pension funds, however, may not even receive that much data, said David Parrish, a lawyer representing private equity investors at DLA Piper.
Smaller investors are at a particular disadvantage in other ways too: private equity firms charge them higher fees than larger clients. While fees for large investors have decreased due to successful negotiations, small investors still typically pay the full 2% management fee, according to Preqin.
ILPA first proposed a standardised fee and performance reporting template in 2016. Although some firms have adopted the framework, about half of the market still does not comply. A recent SEC attempt to mandate standardised reporting was blocked by a court ruling last year.
