Selecting An Optimal Private Equity Fee Validation Methodology

These are good times to be a private equity fund investor. Returns have been strong with distributions on the rise, both in the U.S. and Europe. Limited partners, for their part, have voted with their wallets that the asset class will continue to outperform. Indeed, fundraising continues to be strong, with over $213 billion raised as of August of this year.The industry is on track to capture the most assets since the high watermark set in 2007 when $519 billion was raised.

One area of weakness the industry is still grappling with, however, is the acceptance that transparency around private equity fees needs improvement.The industry has come under increasing scrutiny by regulators and legislators, both in the U.S. and in Europe, with a number of GPs having been fined for improper allocation of fees to their investors.

There are a number of significant “hot spots” that regulators and LPs have been looking at including broken deal expenses, monitoring costs, fee offsets and rebates, proper assignment of expenses (being assigned to the LP vs. the GP) and carried interest transparency.A lack of disclosure around different fee types, along with variations in waterfall calculation methodologies, however, makes the reconciliation process difficult for LPs.

The question, then, becomes, what can LPs do about it?As much as consortiums such as the ILPA and the FCA move forward with standardization, investors still face the very real challenge of having to reconcile the myriad fees and expense structures across their fund managers – both present and future.It can be a daunting process. Thankfully, there are a number of solutions.

There are three main considerations to validating fees successfully: