Outside money managers are facing increasing scrutiny about the value they provide, particularly since the 2008 financial crisis. In a previous publication from September 2014, we wrote that the US Securities and Exchange Commission’s (SEC) increasing examination of fees could cause industry-led change. We are now seeing this change transpire. SEC imposed standards are setting a higher benchmark for disclosure, causing institutional investors to encourage managers to provide more specific fee information from the outset and on a periodic basis.
According to the Wall Street Journal, a number of senior US officials recently wrote to the SEC to demand stricter rules, based on concerns that public pension schemes are not able to provide a full breakdown of fees.
The US public pension fund, California Public Employee’s Retirement System (CalPERS) said earlier this year that it was working to identify the value of unknown fees charged by the PE funds in which it invests.
In Europe, a similar picture is emerging. In 2012, the Dutch Central Bank established standards for reporting asset management costs. Now, APG, the Dutch pension asset manager, has developed the technology to measure fees as a percentage of added value. Several other Dutch pension funds, including PGGM, are demanding higher levels of disclosure from PE firms.
With institutions such as APG and PGGM threatening to think twice about investing with managers that do not comply with their full disclosure requirements, this trend toward more stringent transparency and disclosure requirements could present a long-term risk to sponsors who are unwilling or unable to comply.
PE firms would be wise to consider their approach to disclosure and to ensure they allocate fees in line with the principles set out in their limited partnership agreements, due diligence questionnaires and private placement memoranda (PPM). If fees fall outside this scope, or if there is doubt whether the fees are sufficiently disclosed, firms should consider notifying investors and, if appropriate, seeking investors’ approval if there is any conflict of interests. In this era of closer fee scrutiny from both regulators and institutional investors, full and consistent transparency will be the most prudent strategy for PE firms.