With institutional investors increasingly focused on transparency, the stakes are changing for investor reporting. On deck is a lot more detail on fees, expense allocations, assets, and more. A key influencer behind this effort is the Institutional Limited Partners Association (ILPA), a trade organization with more than 450 members representing over $2 trillion in private equity AUM (per its website). The group has issued a set of reporting standards aiming to enforce some consistency in the way private equity managers report investment information to LPs.
To better understand ILPA standards and their implications, we sat with Juniper Square’s MK Heck (Director of Investor Programs) and Jonathan Charny (Head of Solutions Engineering), who led development of our latest ILPA reporting feature.
Below, they discuss why the reporting standards trend has been gaining momentum, and how managers can prepare.
Let’s start with some context. What’s the impetus behind standards initiatives such as ILPA’s?
MK Heck: To understand ILPA and its goals, just Google “pension funds private equity fees” and see what news comes up. For a long time, institutional LPs have struggled to get the data they need from PE managers to properly calculate fees, and honestly, to properly assess their portfolios.
Some have been unable to answer basic investment committee questions like “how much did we pay in fees to our real estate PE managers last year?” Or, more importantly, “how much did those higher-than-public-equities fees impact our beneficiaries’ net returns?”
There’s also an issue of LPs not having adequate data to quickly assess portfolio risk. That’s problematic, for example, during the aftermath of natural disasters. In these cases, LPs have been scrambling to merely identify their affected assets.
All of this has created backlash from LP beneficiaries like the firefighters and nurses and teachers. A handful of states (e.g., California, Washington, and Virginia) have even proposed or passed legislation requiring varying levels of public fee and expense disclosure for public plans’ private equity investments.
In turn, the pendulum is swinging toward the LPs and we’re seeing them have a lot more leverage over the reporting they’re requiring from managers.
What’s actually preventing LPs from properly assessing their PE portfolios?
MK Heck: The LPs we talk to are overwhelmed with investment information. But most of that information is unusable for any sort of analysis. For starters, individual managers take varying approaches to calculating and reporting investment metrics. Beyond that is the issue of data delivery: PE real estate managers still commonly report to their investors via PDF!
What we actually see LPs doing is either hiring third-party consultants or dedicating internal staff members to manually transcribe data out of PDFs to get it back into a tabular format (like Excel) before they can even begin to do their analyses. It’s a painful process!
So standards efforts like ILPA’s are not just attempting to influence a consistent set of data points and a consistent calculation methodology, but also the delivery of all of this data in a tabular format so that LPs can attempt to compare and consolidate data across managers.
A secondary goal is to reduce the number of individual LP reporting requests managers field by encouraging LPs to adopt one common set of reporting templates. Time will tell if that materializes.
So what standards has ILPA rolled out? And what’s adoption been like?
Jonathan Charny: ILPA has issued several standards, including two Excel-based reporting templates covering capital call and distribution notices; capital account statements; and fee- and- expense- reporting. All of these templates originated from the private equity buyout space, but they’ve also been applied to real estate and other real assets.
At Juniper Square, we’ve seen a recent uptick in ILPA compliance, especially among our managers who have institutional LPs. In most cases, managers pursuing ILPA compliance are working to satisfy requirements laid out by a handful of their major LPs outlined in a side letter as a condition of investment. We have a number of those examples across our customer base now, whereas two years ago we probably had none.
We identified enough customer interest to prioritize developing support for the standards, and recently released new capabilities designed to help managers streamline ILPA compliance.
Is it in fact hard for managers to adopt ILPA? Historically, what’s been preventing these kinds of standards from gaining more traction?
Jonathan Charny: Traditionally, the issue for managers has not necessarily been a lack of will, but more so a lack of a way. I think a lot of managers have ILPA on their radar, and they’re sympathetic to what LPs are looking for in terms of data, but operationally it can be challenging to adopt the ILPA standards.
For many managers, their business processes simply aren’t designed for it. Their accounting ledgers aren’t configured to support it, or they’re relying on spreadsheets as their system of record. For managers operating out of spreadsheets, it can be a costly undertaking to comply with ILPA. It requires manually transferring data from one set of spreadsheets to another. And relying on spreadsheets as data sources also leads to incomplete data sets, meaning managers often can’t even locate the data needed to fill these templates.
Traditionally, the issue for managers has not necessarily been a lack of will, but more so a lack of a way.
What adds to the complexity for managers is that ILPA isn’t the only standards body out there. In real estate, OSCRE, PREA, NCREIF, ANREV, INREV and others are also working on reporting standards initiatives. (Several of these organizations have joined forces to form the Reporting Standards.) And there are existing asset management industry standards such as the CFA Institute’s Global Investment Performance Standards (GIPS®).
Plus, with any of these standards, there’s not really an incremental approach to adoption. It’s typically an “all or nothing” paradigm.
At the same time, most of the individual LP reporting requests in real estate today focus on asset-level metrics—data not even contemplated by ILPA. Consequently, managers have a hard time gauging whether adopting ILPA will alleviate any of the custom reporting work they already complete for individual LPs.
Considering all of this, it’s not surprising to us that most managers we work with couldn’t justify the cost of ILPA compliance in recent years.
For customers of Juniper Square, how does the new ILPA feature work?
Jonathan Charny: One of the first ILPA templates originally issued in 2011 is a standardized version of a capital call and distribution notice in Excel (which we call ILPA Notices). This is the template Juniper Square has now automated.
The Juniper Square platform already stores all of the requisite transaction data to produce ILPA Notices. That means there’s no incremental work for Juniper Square users to produce these notices for their investors who require it. It merely entails checking a box within our system. The output is an ILPA-formatted Excel template (and related documents) that LPs can use to feed into their own internal models.
What advice would you give to managers considering ILPA adoption? What’s on the horizon in terms of LP reporting expectations?
Jonathan Charny: ILPA Notices are just the tip of the iceberg. Phase two for ILPA—the capital account statement issued more recently in 2016—gets at the core of ILPA’s goal to drive more transparency around fees, expenses, and carried interest.
Compliance means that managers not previously reporting fees will need to do so. For those that were already reporting fees, there’s far more depth in the required reporting. With ILPA, fees that haven’t been previously reported—like acquisition, disposition, refinancing, and legal fees—must now be broken out and made transparent. The template also requires managers to disclose fees paid by the investor, the GP, and the fund side-by-side, giving investors the opportunity compare their own fee loads with those of other investors and the fund as a whole.
So if you believe that ILPA is a harbinger of the future for private equity reporting—that this is where the industry is headed in terms of reporting transparency—then you should start thinking about how you’re going to track and enumerate all of these fees.
If you believe that ILPA is a harbinger of the future for private equity reporting—that this is where the industry is headed in terms of reporting transparency—then you should start thinking about how you’re going to track and enumerate all of these fees.
Given where the market is moving, how can managers best prepare? What are the implications for the changes in business processes that are required?
Jonathan Charny: The next step for managers is to get your data out of spreadsheets and into a structured and centralized software platform from where it can then be extracted.
That’s not to say that managers couldn’t build in-house solutions to comply with ILPA. It’s certainly possible. But ILPA templates are constantly changing. Anything built today will require updating every time ILPA comes out with a revision.
Structuring your data requires some upfront work. But once your data is structured within a software platform that understands that data—and how that data relates to each other—generating any sort of standards template essentially boils down to writing code to query your data. In the grand scheme of things, that’s a trivial exercise. And it means that with the right software you can comply with many different standards at once, with virtually no additional work.
MK Heck is Director of Investor Programs at Juniper Square. Prior to joining Juniper Square, she was a Vice President of Investor Relations at Stockbridge, responsible for investor communication and portfolio management for the firm’s opportunistic real estate business. Prior to Stockbridge, MK worked in investor relations for Blackstone’s Global Real Estate business in New York City. MK holds a B.A. in Economics and Environmental Science with a minor in International Relations from Bucknell University.
Jonathan Charny is Head of Solutions Engineering at Juniper Square, previously serving as a Product Manager at the firm. Prior to joining Juniper Square, he was a Vice President in the Asset Management group at W. P. Carey, a global net-lease REIT and investment manager, where he personally managed a $1.2-billion, diversified real estate portfolio across 27 U.S. states. Jonathan holds a B.A. with honors in Cognitive Science from Johns Hopkins University.