Increasing reporting and transparency demands for PE funds


Financier Worldwide Magazine

September 2015 Issue

September 2015 Issue

Private equity fund managers who have been in the business for a while most likely long for the days when the only external reporting they needed to do was to provide their limited partners with investor statements. In the aftermath of the financial crisis, these managers face a sea change. Today, virtually all asset managers, including private equity fund managers, must now report on a periodic basis to both their regulators and investors many details about their business operations and their investment performance, as well as information regarding their fund’s risk profile such as liquidity risks, market risks, funding risks and capital risks.

The Dodd-Frank Act in the US spawned a number of risk-related regulatory reporting requirements such as Form PF, CPO/PQR and other reporting requirements for managers of private funds. As a result, many private equity fund managers must report financial and risk profile details to the SEC such as the extent of leverage incurred by their portfolio companies, the use of bridge financing, and their funds’ investments in financial institutions. Similarly, with the passage of the Alternative Investment Fund Managers Directive (AIFMD) and the concomitant Annex IV reporting in Europe, private equity fund managers are now subject to new, complex and onerous reporting requirements never before required by regulators. For example, under AIFMD, private equity fund managers are required to provide as part of the fund’s annual report disclosures around the fixed and variable aspects of compensation including the carried interest for key employees and partners. In addition, AIMFD has a number of risk management-related reporting and disclosure requirements such as: investment types and concentrations, valuation, and stress tests.

On the investor side, we have begun to see a similar trend emerging. Private equity managers are seeing more demands, especially from institutional investors, to not only provide performance and expense data, but also very detailed information regarding individual portfolio companies and regarding the portfolio as a whole. For example, the reporting template of a very well known institutional investor requires portfolio data ranging from portfolio breakdowns by investment type and industry sector as well as policies and procedures to ensure that the private equity fund manager is compliant with the investor’s social and environmental investment guidelines.

Key recommendations

In this new regulatory and investor driven landscape, reporting requirements are not something the private equity fund managers can either opt out of or ignore. Therefore, we recommend that private equity fund managers consider doing the following:

Sound, unified and cost effective process. Although there are a number of notable differences in the various financial, operational and risk management-related reporting that private equity funds managers must do today, there are also many areas of similarity for private equity fund reporting to regulators and investors. We recommend fund managers take a strategic and deliberate approach to this reporting. Specifically, we believe that being proactive in ensuring that the fund manager’s infrastructure, processes and controls are sound, unified and efficient in addressing all external reporting makes sense from both a legal/compliance and a cost perspective.

Independent review and expert assistance. In order to ensure that a private equity fund manager has a sound, sustainable and cost efficient process for all types of regulatory and investor reporting, we recommend outside legal review as well as an independent risk management review.

In terms of an outside legal review, a fund manager would be wise to use qualified and experienced outside legal counsel to confirm that their reporting approach and strategy (e.g., timing, format, and reporting entities) fully meets all of the appropriate legal and regulatory requirements for proper reporting to regulators and investors.

For an independent risk management review, given that much of the data and risk statistics that are required under the various regulatory and investor reporting, such as Form PF, Annex IV, and Open Protocol, etc., are not only complex, but critical for an accurate portrayal of the fund’s risk profile, we believe a fund manager should use a qualified and experienced risk management adviser to independently review and validate the risk statistics they report. Depending upon a fund’s internal capabilities, it may also make sense to have the risk management adviser assist in the production and validation of these risk statistics.

In-house vs. outsourced approach. Given the breadth and depth of the various regulatory and investor reporting requirements and the tremendous work and resources (e.g., staffing, software and systems) necessary to properly complete all of this reporting, we strongly recommend that fund managers fully evaluate the pros and cons of performing reporting internally versus on an outsourced basis. Both an ‘in-house’ approach and an outsourced approach have a distinct set of advantages and disadvantages. For example, funds that have outsourced their risk-related reporting, such as Form PF, CPO/PQR, have found it very difficult to review and check the accuracy of the final numbers produced by their service provider because they cannot see how the data was aggregated or calculated. On the other hand, for funds that are doing all of the external reporting work in-house, we have found that many of these funds are challenged in developing a reporting process that is not only sound, efficient and cost effective, but also has the scalability to incorporate future or evolving reporting requirements.

Competitive differentiator. All things being equal, in today’s environment we have found that more and more institutional investors place a significant premium on transparency from funds, with particular regard to risk-related transparency when deciding to stay with an existing manager or invest in a new manager. From our experience, funds can better differentiate themselves from competitors by providing the ‘right kind’ of risk transparency in their external reporting to investors and marketing materials. Proper risk-related transparency is the new normal and is essential to attracting and retaining investors and ensuring that there are no ‘red flags’ or material errors in regulatory reporting.


Samuel K. Won is the founder and managing director of Global Risk Management Advisors. He can be contacted on +1 (212) 230 1610 or by email:

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