Private equity funds offer investors unique access to exclusive investment opportunities that are typically unavailable through traditional public markets. The term "private" itself hints at their distinctive nature, allowing investors to explore specialized investment landscapes that would otherwise remain inaccessible.
However, “private” has another implication, as in opacity regarding fees and investment returns. It’s a problem facing all investors, including those in commercial real estate who enter private funds. When it is difficult or even impossible to tell what fees are charged and the size of investment returns, investors cannot calculate their returns and understand how they fit into their portfolios and strategies.
The Institutional Limited Partners Association proposed new guidelines for standardized financial reporting by private equity companies, according to a report by The Wall Street Journal report. Members of the ILPA include large U.S. pension funds, which have the financial leverage to push their interests.
Pension funds have invested in private equity for years. The reporting has never been as robust as that of public equities, but the returns can often be higher. The Securities and Exchange Commission increased disclosure requirements for private equity and hedge funds in 2023.
Hedge funds with at least $1.5 billion in assets under management would have 72 hours at most to report "certain events that we believe may indicate significant stress or otherwise serve as signals of potential systemic risk implications or as potential areas for inquiry to mitigate investor harm," the SEC wrote at the time. Such events include "extraordinary investment losses, certain margin events, counterparty defaults, material changes in prime broker relationships, operations events, and certain events associated with redemptions."
Private equity funds would have 60 days after the end of a quarter to report secondary market transactions and "general partner removals and investor elections to terminate a fund or its investment period." Funds of more than $2 billion will also have additional annual reporting requirements, including strategies and use of leverage.
However, the private equity and hedge funds successfully sued the SEC and last year a court struck the rule.
As the Journal wrote, PE firms have still tended to vary the amount of information they disclose to clients, depending on the size of their investment. Small and mid-sized pension funds were often left without adequate information and even larger ones found it hard to compare performance across firms. There is so much demand for access that top PE companies have extensive leverage in negotiations.
Pension funds have complained that PE firms have used financial engineering to improve apparent returns, leading to an increase in fees without necessarily delivering improved results. According to data that the Journal received from Preqin, the average PE management fees have dropped by more than 25 basis points, and yet the median fee remains at 2%, suggesting that bigger investors are getting significantly better deals.
A successful outcome for the ILPA, however, does not automatically ensure benefits for limited partners who are not members of the organization.