IPEV IRGs, EVCA Reporting Guidelines and ILPA Investor Reporting Guidelines compared: which ones should we choose?
The International Private Equity and Venture Capital Valuation Guidelines Board released for comments on April 4, 2012 its Draft Investor Reporting Guidelines for Private Equity and Venture Capital Funds, which were requested by the European Private Equity and Venture Capital Association as an update/revision to the EVCA Reporting Guidelines. The Board closed the official comment period on June 8, 2012 and plans to issue the official guidelines in late 2012 following any amendments that reflect constituents’ comments. The overriding question for general partners now is precisely which set of guidelines they should be preparing to adopt and whether the EVCA Reporting Guidelines will be replaced by IPEV IRGs once in force.
The International Private Equity and Venture Capital Valuation Guidelines Board (IPEV Board) Investor Reporting Guidelines (IRG) have been under development since mid-2010 with the objective of producing a global successor to existing national and regional reporting guidelines, as well as building on the work undertaken by general partners (GP) and limited partners (LP). The IPEV IRGs are principles-based best practice guidelines for voluntary compliance and self-regulation and are not to be confused with the IPEV Valuation Guidelines. The European Private Equity and Venture Capital Association (EVCA) requested the IPEV IRGs, which were prepared as a revision of the EVCA Reporting Guidelines. From early on in the process in 2010 a representative of the Institutional Limited Partners Association (ILPA) was involved; subsequently in December 2011 a pre-consultation draft was submitted to ILPA for the association’s comment. Notwithstanding its role in the process, ILPA has issued its own Best Practice Investor Reporting Guidelines and Standardised Reporting Templates, initially in January 2011 with its Capital Calls & Distribution Notice Standardised Templates, and subsequently with its Standardised Quarterly Reporting Template in October 2011.
How do the IPEV IRGs differ from the ILPA Reporting Standards?
Whereas a substantial portion of the IPEV IRGs overlaps the ILPA Reporting Standards, the following bullet points illustrate the differences between the two documents:
- Unlike the ILPA Reporting Standards, the IPEV IRGs do not mandate specific templates or reporting formats, although the IPEV Board envisages developing relevant examples that will be published on its website. David Larsen, an IPEV board member, comments: “The Draft IPEV Investor Reporting Guidelines provide essential disclosure principles, yet they allow for flexibility in how information is reported, because funds differ in their structure and focus, reporting guidelines must accommodate differences among funds while ensuring comparability of critical information.” IPEV believes that the format should be driven by an individual GP in consultation with its LPs to ensure that specific fund characteristics are taken into account.
- IPEV acknowledges that it does not and should not promulgate GAAP or the content of financial statements.
- The IPEV IRGs suggest that the measurement basis of information should be at fair value determined consistently with the IPEV Valuation Guidelines.
- The IPEV IRGs provide guidance on the characteristics a GP may use to indicate compliance with the guidelines.
In addition to these major differences stated by the IPEV Board, ILPA issued a document called "Comparison Summary of ILPA Reporting Guidelines Issued in October 2011 to IPEV Investor Draft Reporting Guidelines released April 2012" comprising six more difference:
IPEV IRGs vs. ILPA Reporting Standards vs. EVCA Reporting Guidelines
The question that many GPs are now asking is which set of reporting guidelines they should be adopting – the new IPEV IRGs (when available), the ILPA Reporting Standards or the EVCA Reporting Guidelines (assuming there is such an option)?
IPEV IRGs vs. ILPA Reporting Standards
In addressing the first part of that question, that is, whether to adopt the IPEV IRGs or the ILPA Reporting Guidelines, this leads us to another critical consideration about just how powerful ILPA is and what the likelihood would be of LPs en masse imposing the ILPA Reporting Standards.
In the wake of the global economic downturn that unfolded in 2008, ILPA has been representing its 250-plus members1 as the balance of power has steadily shifted away from GPs in favour of LPs, which has resulted in ILPA having strengthened its relative position. The ILPA Private Equity Principles, which are embodied in the terms and conditions of many private equity funds, are also increasingly being implemented in the Limited Partnership Agreements (LPA) of new fund offerings, spurred on by many LPs’ new-found bargaining power in the current tough fundraising conditions. According to Preqin data,2 57% of LPs have previously decided not to invest in an otherwise appealing fund due to the proposed terms and conditions, which is clear evidence to support this argument.
So, if you are a first-time GP raising your debut fund, you may need to concede to the ILPA-advocated fund terms and conditions and the ILPA Reporting Guidelines. However, if you are an established successful top-decile GP with an oversubscribed subsequent fund – some of them we have been fortunate to have seen lately – you may not need to comply with all the ILPA-promoted fund terms and conditions and the ILPA Reporting Guidelines. Even if you are one of the most successful GPs and count among your fund investors some of the most prominent (and powerful) LPs, such as CalPERS (The California Public Employees’ Retirement System), that have endorsed the ILPA Reporting Guidelines and have adopted a new standardised reporting system effective from March 2012, I am sure you would have accommodated their requirements/requests, or at least some of them. If you work with prominent world-class LPs, either as direct investors or through a fund of funds, you will no doubt have received requests from them to use the ILPA Capital Call & Distribution Notices Standardised Templates. The next step will likely be implementing the ILPA Quarterly Reporting Standards with other institutional LPs to follow suit.
IPEV IRGs vs. EVCA Reporting Guidelines: what to do when the IPEV IRGs are published?
And finally, if you are currently reporting under EVCA Reporting Guidelines, you should be preparing to understand how to react when the official version of the IPEV IRGs is publicly available. Would both options continue to coexist or would the IPEV IRGs replace the EVCA Reporting Guidelines? Do you adopt the new global IPEV IRGs as a replacement of the more local (European) EVCA Reporting Guidelines or do you continue to apply the EVCA Reporting Guidelines? If you take the first option and adopt the new global IPEV IRGs, do you decide to roll out the guidelines to your existing funds where the LPA stipulates compliance with the EVCA Reporting Guidelines or you adopt them only for new funds? And yet another question if taking this approach: what would the transition period be? Given that it is not a piece of legislation, it is very doubtful that there would be any transition timeframe or grandfathering clauses.
We have posed some of these questions to the IPEV Board, which has have confirmed that once EVCA has endorsed the reporting guidelines EVCA’s guidelines will cease to be in force and will be replaced by IPEV’s. The IPEV Board has also commented that for existing funds it will be a matter of discussion between a GP and it LPs, unless the LPA had foreseen a future edition of the EVCA reporting guidelines that would become de facto IPEV reporting guidelines. As a matter of comparison in Europe, LPAs tend to specify that the valuation should be done according to the IPEV Guidelines as endorsed by the relevant EVCA edition or a subsequent edition of the guidelines. The IPEV Board is now assessing the comments received from constituents with the aim of working towards official publication of the IPEV IRGs early in the fourth quarter 2012.
To follow up on the story make sure you read our interview with the IPEV Board member David Larsen to be published in Issue 1 of our PE Technical Journal International to be out in October 2012.
1 ILPA's 250-plus members comprise Public Pensions, Corporate Pensions, Endowments, Foundations, Family Offices and Insurance Companies representing over US$1 trillion of private assets globally.
2 The 2012 Preqin Limited Partners Universe.