Post Summary
Convergence mapped fee and expense disclosures made by 4,477 non-exempt advisers to private funds, covering hedge fund, private equity, real estate, venture capital, single adviser fund, and other structures, as of February 28, 2019, against 50 standard expense types.
The top five, by percentage of advisers disclosing: investment-related expense at 99.62%, management fees at 98.82%, custody fees at 97.98%, audit expenses at 95.46%, and other fees and expenses at 90.90%.
The bottom five, by percentage of advisers disclosing: charitable contributions at 0.16%, political lobbying at 0.20%, trademarks at 0.24%, memberships at 0.53%, and trade errors at 0.67%.
Compliance expense disclosure was reported at 27% of advisers three years prior to the report and at 67.02% of advisers as of the 2019 data.
Convergence refers to it as the "Goldilocks' debate," described in the report as debating whether disclosure is "too much, too little or just the right amount."
Limited Partner Fund Expenses
10 Common and Less Common Expense Disclosures
Convergence Insight #31
March 11, 2019
The annual Form ADV filing season is upon us and thousands of Compliance Officers are spending many hours and burning hefty dollars with their legal and compliance consultants to ensure they comply with the spirit and letter of the disclosure requirements to complete Section 5 of Part 2A, "Fees and Compensation". We at Convergence describe this as the "Goldilocks' debate", a fruitless exercise of debating what may be "too much, too little or just the right amount of disclosure". To ease the pain and cost of this "debate", we offer you a look at our "10 Common and Less Common Expense Disclosures" made by thousands of Advisers in the market.
The Convergence database reflects "the voice of the market". We mapped and linked fee and expense disclosures made by thousands of Advisers to 50 standard and easy to recognize expense types. Pay close attention to this list, especially to less common disclosures, because if you are allocating them to your LPs, they may come back to bite you, regardless of what your documents permit!
Special Focus on Compliance Expense Disclosures
Three years ago, this expense disclosure was less common at 27% of all Advisers. Consider using granular examples of the types of "Compliance Expenses" you plan to allocate to LPs. It is the growing trend.
Please call George Gainer at 203-956-4824 for more information on how you can determine how common, or less common, your expense disclosures are relative to your peer group.
The population referenced includes 4,477 Non-Exempt Advisers to Private Funds (Hedge, PE, RE, VS, SAF and Other) as of Feb 28, 2019.
Common Expense Disclosures:
- Investment Related Expense, 99.62%
- Management Fees, 98.82%
- Custody Fees, 97.98%
- Audit Expenses, 95.46%
- Other Fees and Expenses, 90.90%
- Fund Administration, 85.65%
- Performance Fees, 79.91%
- Legal Expenses, 77.95%
- Taxes-Funds, 71.21%
- Compliance Expenses, 67.02%
Less Common Expense Disclosures:
- Risk Management Expenses, 6.50%
- Performance Reporting, 3.40%
- Proxy Voting, 1.80%
- Credit Rating Services, 1.47%
- Public Relations, 1.45%
- Trade Errors, 0.67%
- Memberships, 0.53%
- Trademarks, 0.24%
- Political Lobbying, 0.20%
- Charitable Contributions, 0.16%
Key Points
What was the scope of Convergence Insight #31?
- The sample was 4,477 non-exempt advisers to private funds: The report states the population includes advisers to Hedge, PE, RE, VS, SAF and Other fund structures, as of February 28, 2019.
- Disclosures were mapped to 50 standard expense types: The report states Convergence "mapped and linked" adviser fee and expense disclosures to 50 standard and easy to recognize expense types.
- The published ranking covers 20 of the 50 types: The report presents the 10 most common and 10 least common expense disclosures from the full 50-type set.
- The report was published during Form ADV filing season: The report is dated March 11, 2019 and opens by referencing the "annual Form ADV filing season."
Which expense categories were most commonly disclosed, according to the report?
- Investment-related expense: 99.62% of advisers in the sample.
- Management fees: 98.82% of advisers in the sample.
- Custody fees: 97.98% of advisers in the sample.
- Audit expenses: 95.46% of advisers in the sample.
- Other fees and expenses: 90.90% of advisers in the sample.
Which expense categories were least commonly disclosed, according to the report?
- Charitable contributions: 0.16% of advisers in the sample.
- Political lobbying: 0.20% of advisers in the sample.
- Trademarks: 0.24% of advisers in the sample.
- Memberships: 0.53% of advisers in the sample.
- Trade errors: 0.67% of advisers in the sample.
What did the report state about the compliance expense disclosure trend?
- The report states compliance expense disclosure was at 27% of all advisers three years before the report's publication.
The report states compliance expense disclosure was at 67.02% of advisers as of the 2019 data cited.
The report describes this as "the growing trend."
The report recommends advisers "consider using granular examples of the types of Compliance Expenses" they plan to allocate to LPs.
What did the report state advisers should be attentive to?
- The report advises readers to "pay close attention to this list, especially to less common disclosures."
The report states that less common disclosures allocated to LPs "may come back to bite you, regardless of what your documents permit."
The report offers a comparison of an adviser's disclosures against peer disclosure rates, referencing a contact for "how common, or less common, your expense disclosures are relative to your peer group."
What is the full ranked list of expense categories in the report?
- Common disclosures, in descending order: Investment Related Expense (99.62%), Management Fees (98.82%), Custody Fees (97.98%), Audit Expenses (95.46%), Other Fees and Expenses (90.90%), Fund Administration (85.65%), Performance Fees (79.91%), Legal Expenses (77.95%), Taxes-Funds (71.21%), Compliance Expenses (67.02%).
- Less common disclosures, in descending order: Risk Management Expenses (6.50%), Performance Reporting (3.40%), Proxy Voting (1.80%), Credit Rating Services (1.47%), Public Relations (1.45%), Trade Errors (0.67%), Memberships (0.53%), Trademarks (0.24%), Political Lobbying (0.20%), Charitable Contributions (0.16%).