Private equity warned on data leakage

30 Sep, 2014

Private equity managers ought to impose side letters on investors whereby the latter is prohibited through non-disclosure agreements from divulging highly sensitive, confidential information should they receive Freedom of Information (FOI) requests.

This comes as a handful of pension funds in the US had been asked to make public through FOI requests exchanges their private equity fund managers had had with the Securities and Exchange Commission (SEC).

“We had correspondence with a municipal pension fund relating to the Limited Partner’s inquiry regarding the SEC’s findings from our presence exam. We objected to our correspondence with the LP of matters not relating to investment performance including notes taken by the LP representatives being submitted to reporters under the Freedom of Information Act (FOIA). It is our communications with LPs other than discussions about performance metrics that we object to being in the public domain,” said Stephen Hoey, partner- administration, chief financial and compliance officer at KPS Capital Partners, speaking at the SuperReturn CFO/COO Forum in Amsterdam.

Pamela Hendrickson, chief operating officer at The Riverside Company, agreed. “GPs should make sure their LP agreements and side letters are clear about what can be disclosed under a Freedom of information request. GPs must comply with any non-disclosure agreements they have with their portfolio companies and information provided under the Freedom of Information Act should be restricted to ensure that the GPs remain in compliance,” said Hendrickson.

These demands for transparency come following a speech in May 2014 by Andrew Bowden, director of the Office of Compliance Inspections and Examinations at the SEC, where he identified potential conflicts of interest between private equity firms and their investors over fees, expenses and portfolio company valuations. There are concerns at the SEC that some private equity shops are charging investors unfairly for expenses.

The SEC has recently been questioning private equity managers about their deals and fees dating all the way back to 2007. There is speculation the US regulator could clamp down on private equity fees following its announcement back in 2013 that it would be reviewing the fees and expenses’ policies at hedge funds amid concerns that travel and entertainment costs, which should be borne by the 2% management fee, were in fact being charged to end investors.

“The SEC is taking a strong interest in fees, and this has become apparent in regulatory audits as they are heavily scrutinising the fees and expenses that we charge. Following the Bowden speech, we received a material number of calls from our Limited Partners whereby we explained our fee structure and how costs were expensed accordingly. We also pointed out that our allocation of expenses was in conformity with the LP agreements, which is the contract between the General Partner and a fund’s limited partners,” said Hoey.

A survey by data provider Preqin found management fees to be the top area of concern for investors when polled on issues surrounding fund terms and conditions. Fifty-six per-cent of investors believed the management fee at private equity managers needed to be changed. This was trailed at 29% by disquiet that General Partners (GPs) did not invest enough of their net worth into their funds.

However, the bulk of investors (76%) told Preqin that LP and GP interests were firmly aligned, compared with 23% who felt the polar opposite. This is a marked improvement from previous years. In 2012, 67% of respondents said GP and LP interests were aligned, while this stood at a mere 47% in 2011.

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