April 5, 2018
As the alternative investment space continues to mature and evolve, Limited Partner (“LP”) reporting requirements are becoming more complex and demanding. This trend is driven by LPs requiring increased transparency, and by the proliferation of complex, special terms negotiated by individual LPs in the Limited Partnership Agreement (“LPA”).
As Limited Partners become more sophisticated they are demanding more transparency from the funds in which they are invested. LPs want to understand exactly how General Partners (“GPs”) are utilizing their capital and what the exact return is on each dollar spent. This reporting requirement allows LPs to better manage their own internal cash flow obligations, report back to their constituents and determine which GPs to allocate capital to in the future. To this end, LPs now include back-office management and reporting as a key item on their due diligence check list when determining which funds to invest in. Given this trend, reporting transparency has become a central tenant advocated by the Institutional Limited Partner Association (“ILPA”), the largest LP advocacy group.
Complicating GPs ability to meet their investors needs to report accurately, transparently and in a timely manner is the explosion of special terms negotiated by individual LPs in a funds LPA. The requirements for special terms from LPs have increased to better align with their specific mandates and as a way to achieve increased benefits as a differentiation from competing GPs. These unique terms need to be constantly managed, adhered to, and accounted for to both remain in compliance with the LPA and report accurately to LPs. These special terms take several different forms including:
- Increasing frequency of opt-outs
- Special carry interest percentages and preferred return rates
- Blending of European and deal-by-deal waterfalls
- LP specific carry reserve requirements (clawbacks)
- Scaling GP carry based on fund performance
It is difficult, if not unachievable, for GPs to be in compliance of specific LP requirements without detailed accounting of investor capital. Absent rigorous reporting processes, an individual LP’s capital performance, which is based on LPA terms, becomes more difficult to measure. Basic excel models can no longer handle the level of sophistication needed to support LP needs, and are not dynamic enough to track and accurately report performance in complex waterfall situations.
To be successful in this new, complex LP reporting environment GPs need a comprehensive capital administration suite, including integrated fund administrators, capital administrators and investor servicing. A successful capital administration program will allow GPs to accurately and transparently report to its LP base, manage increased LP requirements, and, hopefully, help develop a successful, long term relationship.