How Private Equity Firms Should Disclose Fees, Loans to Investors

Private equity managers should share more information about management fees and subscription lines of credit with their investors, according to an updated set of guidelines from Institutional Limited Partners Association. 

ILPA’s Principles 3.0, released Thursday, calls for private equity firms to spell out which expenses are covered by the management fees they charge investors. The fees should help pay overhead costs, the salaries of private equity managers and relevant advisers or affiliates, travel, and other investment activity costs, ILPA said.

While the association has seen private equity firms begin to disclose more of what their management fees cover, limited partners want more transparency, according to Jennifer Choi, managing director of industry affairs at ILPA. They’re concerned that the management fees they’re paying may exceed the cost of running a private equity fund. 

“We wanted to make sure that we reinforce the message that limited partners need more visibility in what they’re being charged,” Choi, the primary author of ILPA's Principles 3.0, said by phone Wednesday. 

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ILPA also wants to see more transparency surrounding subscription lines of credit, or short-term loans used by private equity firms to delay calling capital from investors. These loans have grown in popularity, with Preqin saying in a report this month that nearly half of funds formed after 2010 use subscriptions lines, compared with 13 percent of funds created prior to 2010.  

Investors worry that subscription lines of credit may be used to inflate internal rates of return. IRRs may appear higher when the credit lines are “open” for a long period before capital is called, according to Choi. 

ILPA recommends that private equity managers regularly disclose fund-level leverage, including borrowings under subscription lines of credit, in quarterly and annual reports.

“Any subscription line facility used should be reasonable in both size as a percentage of the total fund as well as duration,” ILPA said in the Principles 3.0 document.