Pension funds push once again for private equity transparency

Pension funds and other institutional investors are pressing private-equity firms to provide more standardized reporting on fees and investment performance, reflecting long-standing frustration over inconsistent and opaque disclosures.

Citing sources familiar with the matter, the Wall Street Journal reported that the Institutional Limited Partners Association, a trade group representing pension plans such as the California Public Employees’ Retirement System and the State of Wisconsin Investment Board, recently proposed new guidelines aimed at improving transparency in the private-equity sector.

According to the Journal, those guidelines are designed to standardize how firms report financial performance and fees, which have been an especially thorny challenge for smaller and midsize pensions when attempting to evaluate fund managers.

“I’m a big believer that sunshine is the best disinfectant,” Scott Ramsower, head of private-equity funds at the Teachers Retirement System of Texas – which is one of the state-run managers steering the initiative – told the publication. “We can then have much more detailed conversations with our [private-equity] partners and hopefully be putting pressure on them to really be thoughtful.”

The push for greater transparency comes as private-equity assets under management have tripled over the past decade, with fees rising at twice that rate, according to data from Preqin.

As the Journal observed, that fee growth has been fueled in part by fund managers using subscription lines and net-asset-value loans to enhance short-term returns, consequently raising the fees they collect. Critics say such strategies can mask performance, making it harder for investors to distinguish top-performing managers from those relying on financial engineering. Slumping returns last year have also pushed US pensions and endowments to re-weight their portfolios from PE to lean more on traditional stocks.

David Parrish, a lawyer at DLA Piper who advises private-equity investors, said the lack of standardized disclosures disproportionately hurts smaller investors. “There’s no justification for the [private-equity] community to tell someone, ‘I only give that information to my large investors,’” Parrish told the Journal.

While some PE firms have adopted a fee and performance template proposed by ILPA in 2016, roughly half of the market has not, creating a fragmented landscape for pensions seeking consistent data. Although the Gary Gensler-led Securities and Exchange Commission attempted to require quarterly reporting on fees and expenses with new rules in 2023, that effort ultrimately failed last year after private-equity managers challenged those rules.

For smaller pension funds, the stakes are particularly high. Preqin data show that while larger investors have successfully negotiated lower fees, smaller pensions continue to pay a standard 2 percent management fee, further widening the gap between large and small investors in their ability to access and compare fund performance.

But even as institutional investors continue to air their frustrations, representatives from PE firms maintain that they already provide sufficient information to support investors’ decision-making.

“Private-equity firms work every day to ensure investors have the information they need to make the best investment decisions for retirees across America,” Drew Mahoney, chief executive of the American Investment Council, told the Journal.