Limited partners (LPs) are demanding greater and greater levels of transparency from general partners (GPs) today. But what, exactly, does that mean, and how can GPs deliver it? In a recent Buyouts Insider webinar sponsored by Backstop, five industry experts gave their perspectives on this increasingly critical LP requirement. In case you missed it, these were the highlights:
- Transparency Begins Face to Face
Due diligence questionnaires (DDQs) are standard practice in the alternative investment industry. But some LPs, such as The Hillman Company, are finding that it is better to gather the information requested in a DDQ face to face, rather than having a GP fill out a form. Bryan Battaglia, Director of Finance, The Hillman Company, noted that in a face-to-face meeting, the LP is able to find out more than facts. They can get to know the GP team and become familiar with the GP’s history, approach, and philosophy. Personal meetings establish a long-term relationship built on trust.
- Organization Indicates Transparency
Star Mountain Capital is a GP with experience as an LP, so they know – from both sides of the table – the importance of being well organized when fundraising. Brett Hickey, Founder & CEO, Star Mountain Capital, stated that it is vital for GPs to spend time developing marketing materials that are clear and complete. The degree of organization displayed at the fundraising stage communicates a distinct message to prospective investors about how the GP operates their business.
- Transparency Is in the Details
As an organization of over 400 institutional investors, the Institutional Limited Partners Association (ILPA) has zeroed in on the details LPs want to see to meet their demand for transparency. Matt DeMatteis, Director of Research, ILPA, stated that a top priority is deeper and more standardized disclosures on fees and costs. ILPA has developed a reporting template for fees, expenses, and carried interest. The template includes:
- Individual LP Balances
- Offset Recon for Roll-Forward Balances
- NAV Reconciliation
- Incentive Allocation Reconciliation
- LP Commitment Reconciliation
- GP Revenue Sources (from LPs and Portfolio Companies)
- Drivers of Transparency
LPs are not the only ones pushing for transparency. As Shawn LeClaire, Vice President, TorreyCove Capital Partners, commented, the ILPA is seeking standardization of LP reporting, some states are making the legal reporting requirements for State Administered Plans more rigorous, and the Securities Exchange Commission is performing routine exams and taking punitive actions against investment firms for failures to appropriately report and disclose information.
- Technology Supports Transparency
The fact that customized databases and in-house analysts are standard operating procedure for many LPs today has generated an unprecedented appetite for data transparency to improve reporting and decision making. Adam Pinkert, Director of Private Equity Solutions, Backstop Solutions Group, discussed the role of technology in supporting this thirst for transparency. He advised GPs to do the following in order to allow investors to explore their portfolio and understand performance attribution:
- Use standard data schemas wherever possible (e.g., NCRIEF, ILPA)
- Use technology that enables LP analysis, such as visualizations and APIs
- Leverage technology that delivers agile reporting, providing both quantitative and qualitative data in one place
Keeping LPs satisfied in an age of increasing transparency is a “must” for GPs across the alternative investment industry – and the demands will likely continue to increase. Fortunately, from face-to-face meetings to cutting-edge technology, GPs have everything they need to deliver the transparency LPs require.