Limited Partners Reporting: What It Is, How to Do It, and Best Practices for Private Equity

Venture capital (VC) and private equity (PE) firms are responsible for more than just managing the investments of their limited partners (LPs). To maintain trust and transparency, they must communicate consistently with their LPs through structured Limited Partner (LP) Reports. These reports provide LPs with a clear overview of fund performance and any associated risks or opportunities.

While LPs aren’t directly involved in day-to-day decision-making, they require comprehensive insight into how their investments are being managed. LP reports offer the data-backed clarity they need. But how does Environmental, Social, and Governance (ESG) data fit into these reports? Let’s dive into the essentials.

Defining key terms

Venture capital (VC) firms: Firms that pool capital to invest in early-stage startups or growing companies with high growth potential, aiming to generate significant returns.

Private Equity (PE) firms: Firms that acquire equity ownership in private companies—or public companies, focusing on mature companies that may benefit from strategic management and financial expertise.

Limited partners (LPs): Institutional or individual investors, such as pension funds, endowments, or family offices, who commit capital to a VC or PE fund but are not involved in day-to-day management.

General partners (GPs): Individuals within the VCs who work with portfolio companies directly, make investment decisions, and participate in the day-to-day management of the VC.

What is an LP report?

An LP Report is a detailed document that outlines the performance and current status of a fund for its LPs. These reports typically provide data on:

• Investment performance (returns, cash flow, etc.)
• Portfolio updates
• Risks and opportunities
• Expenses and fees

The frequency of LP reports can vary, with quarterly, semi-annual, or annual reports being the most common, depending on the agreement between LPs and GPs.

LP Reports are a crucial tool for maintaining transparency and ensuring LPs stay informed about their investments. These reports must be thorough, consistent, and accurate, as LPs may influence major decisions or even withdraw funding based on the insights provided.

Steps to draft an LP report

• Select the appropriate reporting template: Most LPs have predefined templates for how they want reports presented. European LPs often follow guidelines from InvestEurope, while US LPs commonly refer to ILPA guidelines. In the EU, the Sustainable Finance Disclosure Regulation (SFDR) adds a layer of compliance for including ESG data.
• Gather relevant data: GPs need to gather both qualitative and quantitative data on fund performance. This includes return on investment (ROI), portfolio updates, and any relevant ESG metrics. It’s also crucial to anticipate additional data requests from LPs.
• Compile and present the data: Once the data is collected, it should be organised in a consistent format for ease of comparison over time. Transparency and accuracy are vital for building trust and ensuring that LPs can assess the fund’s growth and risks.

{{encartSpecial}}

Key metrics to include in an LP report

Limited Partners Reports should be as detailed as possible so that LPs can feel confident in their investments. LPs will likely request specific information. However, to provide a clear picture of fund performance, LP reports must include a few common data points, including:

• Fund performance: Metrics like net asset value (NAV), internal rate of return (IRR), and total cash returned to LPs.
• Cash flow summary: Details on the movement of funds during the reporting period, including capital calls and distributions.
• Capital call and distribution data: How much capital has been raised from LPs, and how much has been distributed back in the form of returns.
• Portfolio company updates: Risks, opportunities, and performance metrics of the companies in the portfolio, as well as any significant changes in business strategies.
• Expenses and fees: LPs want transparency regarding fees, such as transaction fees, management fees, and any other expenses deducted from their returns.
• ESG metrics: With growing regulatory and stakeholder focus on sustainability, including detailed environmental, social, and governance data is increasingly important.

Best practices for LP reporting

To ensure ongoing LP support and trust, here are some best practices for LP reporting:

• Ensure compliance: Adhere to local and international regulations, such as SFDR in the EU or SEC requirements in the US, to avoid legal complications.
• Be consistent: Regular reporting enables LPs track progress over time and reinforces transparency. Be sure to provide them with the necessary information whenever it's required.
• Integrate qualitative insights: While quantitative data is essential, qualitative insights (e.g., market trends or strategic shifts within portfolio companies) add depth and context.
• Be flexible: Tailor reports to LPs' specific requests and formats, especially when they require additional or non-standard data.
• Be honest and transparent: Build trust by maintaining honesty and clarity in all LP reports.
• Provide comprehensive ESG data: Since ESG is a critical focus for LPs, ensure your reports offer in-depth metrics and meaningful insights on how portfolio companies are addressing ESG risks and opportunities.

Why ESG should be a priority in LP reports

According to a survey by the Institutional Limited Partners Association (ILPA) and Bain, 70% of LPs in North America and Europe incorporate ESG criteria into their investment policies. Additionally, 78% of European LPs reported they would walk away from an investment with poor ESG performance.

Beyond regulatory compliance, ESG reporting provides valuable insights into the long-term risks and opportunities within a portfolio. While some LPs are driven by ethical considerations—34% of surveyed LPs consider a company's ESG practices to make a positive impactt50% view ESG as a means to enhance investment results. Many view strong ESG performance as a way to enhance returns and mitigate risk.

Streamline LP requests with Apiday

One of the biggest challenges in LP reporting is gathering accurate ESG data across portfolio companies.

At Apiday, we simplify this process by providing tailored solutions for PE and VC firms: our platform enables the collection of comprehensive ESG data from portfolio companies with custom-built questionnaires. The collected data is then automatically used to populate each new LP request, with data from previous requests re-applied as needed!

With Apiday’s AI-driven technology, you can streamline both data collection and reporting—ensuring regulatory compliance while delivering the transparency your LPs expect.

Ready to simplify LP reporting? Discover how Apiday can help you meet ESG requirements and provide accurate, insightful reports to your Limited Partners today.