International Administration GroupIAG

As US regulators impose record fines on private equity firms, LPs are clear that greater fee transparency is overdue, says RRiPE 2015

Thursday, November 5, 2015

  • 58% of LPs score their GPs 4 or less out of 10 for clarity of fee expenditure
  • Half of LPs constantly put pressure on their GPs to reduce fees
  • Profits, Partners’ Salaries and Marketing are preferred top three areas to trim

LPs gave a clarion call for private equity fees to be clearly explained in this year’s Reputational Risk in Private Equity Report, against a backdrop of rising demands from US pension funds for proper disclosure and record US Securities and Exchange Commission fines against firms.

The Reputational Risk in Private Equity Report (RRiPE) 2015 surveyed the opinions of over 170 GPs and LPs on the hot topics of private equity fees and cyber security. With the storm over private equity fees showing no sign of abating, 98% of LPs and 73% of GPs agree that a standard for the reporting of fees should be agreed and soon.

However, RRiPE 2015 shows that there is work to be done to close the divide between LPs and GPs, with GPs awarding themselves 8 out 10 for clarity of fee reporting while LPs, on average, score their GPs a dismal 4 out of 10. Further, 58% of LPs think that GPs provide them with incorrect information on how fees are being spent; a charge that is denied by 96% of GPs surveyed for RRiPE 2015.

Commenting, Alan Ross, Commercial Director, IAG (UK), said: “Private equity firms need to wake up and hear the cry for full transparency and disclosure of fees. With industry veterans worried that it will drive institutional investors away, there is no better time to heed the call for fee reform.”

Top areas for fee trim

Although GPs and LPs were divided on whether management fees should decrease, GPs do feel pressure from their LPs to reduce fees. When asked, both sides agreed that Partners’ salaries, Profit and Marketing were the top three areas to trim. Also 60% of LPs want better information to help them track levels of carry.

Growing cyber security threats

RRiPE 2015 also looked at the growing threat of cyber security for the private equity industry with the alarming statistic that 31% of GPs state that at least one of their portfolio companies has been hacked in the last three years, and 50% of GPs saying their portfolio companies are under-prepared to deal with the threat of cyber security attacks.

  •  88% of GPs and 80% of LPs agree that the threat of a security hack or a breach of data is increasing
  • Half of all GPs think their portfolio companies have insufficient safeguards against cyber security threats
  • Over 50% of GPs and LPs have signed a contract with a third party service provider without ensuring that it has adequate protections against hacking
  • One in five LPs and one in four GPs have admitted to breaching their own firm’s data security policies.

Commenting, Afshin Taraz, Managing Director, Thompson Taraz, said: “It’s only a matter of time before a major cyber security incident hits the private equity industry. With billions of pension fund money invested in private equity funds, fund managers and their investors must ensure that they have robust systems and early warning measures in place against a cyber-attack.”