According to a new survey, the vast majority of private equity managers think they communicate well with their investors. Unfortunately, most of the investors disagree. Nicholas Pratt looks at how the two sides might be reconciled.
The phrase ‘must do better’ may have appeared often in your school reports, but in the world of private equity (PE) funds, it is the reporting itself that must be done better. A recent survey suggests that private equity managers or general partners (GPs) are putting their relationships with investors – the limited partners (LPs) – at risk though poor quality of reporting. Furthermore, many of them seem oblivious to the fact.
The inaugural Reputational Risk in Private Equity Report (RRiPE) finds 92% of GPs believe they are providing their LPs with all the information they need. However, more than half (54%) of limited partners disagree and a similar number have put their managers on review due to poor communication about personnel changes or because of inaccurate or incomplete reporting.
Many GPs canvassed complain that their investors are simply too demanding and unrealistic about the capacity of managers – small or mid-cap investors especially – to provide the level of transparency they are seeking.
The survey was commissioned by two private equity fund administrators, Guernsey-based International Administration Group (IAG) and UK-based Thompson Taraz, and canvassed more than 250 private equity GPs and LPs from 26 countries.
“We conducted the survey to examine how the changes in regulatory requirements and the aftermath of the 2007 crash have impacted communication between LPs and GPs,” says IAG’s managing director, Raymond Page. “The results started to bring up some interesting issues about the relationship between the two sides which we hadn’t anticipated. There is a level of suspicion between two parties that are meant to be in partnership.”
For example, 91% of GPs believe that their investors requested information only to benchmark other funds, and 81% believe that their investors requested extra information but never used it.
Just over a quarter of investors did admit to requesting information for benchmarking, and 18% said they requested information and never used it.
Moreover, 58% of LPs believe the rate at which information is reported to them slows down once they have committed to the fund.
Page believes private equity fund administrators have a role to play in fostering better communication between the two sides. “The key aspect is about setting out investor expectations around reporting to make sure the investor gets what they need. This is quite often overlooked at the initial stage. It is much harder to do this once the investment has started. As an administrator, we would like to be involved as soon as possible in the discussions between GPs and LPs, but administration is not typically at the forefront of due diligence.”
Fund administrators also believe they can play a role by taking much of the reporting task off the hands of the GPs, especially as the demands from their investors look likely to increase. “While performance will always be key, operational excellence and the quality of reporting are increasingly cited by LPs as critical factors,” says David Bailey, group head of marketing and communications at private equity fund administrator Augentius.
“Investors want to be closer to their investments than ever before, and a growing number want to dig into fundamental financials at the investee level. They are starting to see the value they can derive from their fund reports by asking for specific data points.
“As this trend continues, and as LPs develop individual preferences as to how their fund data is broken down, GPs will be faced with a huge range of different requests, all of which require time and attention. That care and attention, of course, distracts GPs from their core business of deriving value from their investments. Using a third party to assist with reporting not only reduces the operational burden on GPs, but also gives investors piece of mind.”
Technology and automation may reduce the reporting burden, but this situation seems harder to resolve in the private equity world than elsewhere, says Laurence Fhima, director of alternative investment funds at Societe Generale Securities Services.
“You have all of these different players in the chain – the administrator, the asset manager, the target, the investors, the lawyers – and they all have their own way of communicating, so achieving data standards in the private equity market will be very difficult. There are EVCA guidelines on how to present the information in a fund and to communicate with investors, but there are hundreds of different reports and the sector and the geography of the target can vary from one deal to another.”
Private equity, real estate and infrastructure have pretty low volumes of data. There are fewer transactions or capital calls, meaning automation is less of an issue. Consequently, the industry lags in terms of data standards, says Luc Biren, Luxembourg head of fund services at Alter Domus. “Our clients deliver some reporting in line with these guidelines but not 100%, maybe more in PDFs but not when it comes to sharing data between different systems.”
One project that is aiming to address this is the AltExchange Initiative, founded by a number of LPs, GPs, advisers and intermediaries. It has more than 50 members and released its first data standard in December 2013. Two of the largest vendors in the space – eFront and SunGard’s Investran – are involved in the project, which should at least reduce the fear of competing initiatives from other vendors looking to corner the market.
Biren is supportive of the objectives, even if the project is still in the starting blocks. However, even with more standardisation, the reporting systems are still likely to be unique to the private equity world. The challenge for administrators is to implement separate systems/teams/processes and logic solely for this part of the market, but many of them are trying to replicate the mutual funds model for alternatives with large service centres in different parts of the world, says Biren.
It is a view shared by Miranda Lansdowne, managing director of the Luxembourg office at the JTC Group. “Service providers are seeking to grow their platforms and to cover more fund types with the same system, but it is important to recognise the different aspects of the asset classes and not look to impose a solution on their clients. Similarly, there will be multi-asset managers that will be looking for a one-stop shop in terms of administration, so it will be fascinating to see how this plays out.”
Another obstacle to greater standardisation is the fact that LPs have become more demanding in respect of the format, frequency and sophistication of reporting that they require from private equity managers, says Giles Travers, director, alternative investment funds at SEI Investment Management Services. In addition to industry-defined reporting standards such as from the Institutional Limited Partners Association (ILPA), LPs also want more data for their own modelling and reporting purposes.
For GPs, the increased demands of customised investor reporting have led to a change in operations and more investment in technology.
However, says Travers, GPs are not necessarily looking to go wholesale on to a third-party platform, largely because they all want their own unique take on reporting. “GPs, especially Tier 1 managers, have spent many years building their brand and specific reporting templates with their investors. They now want to use best-of-breed solutions that can build on what their investors are familiar with but enhance it through the latest technology in data warehousing, workflow automation, interactive reporting and mobile capability.”
The underlying accounting systems used are still specific to the private equity, real estate and infrastructure markets as opposed to more liquid alternative asset classes, says Travers. Whereas hedge funds process market information to meet daily net asset value reporting needs that can be standardised to an extent, the private equity world is far less liquid, although there are indications that this is changing.
MORE LIQUID THAN IT WAS
SEI recently published a white paper, Private Equity Liquidity: A Work in Progress, that surveyed more than 200 private equity managers, investors and consultants. It found that more than a third believe the private equity market is more liquid than it used to be, thanks to the growing use of the secondary market and the development of listed and retail funds. Managers are increasingly becoming multi-strategy managers and are pursuing different fund structures in the search for permanent capital. “It is not just direct buy-out funds anymore,” says Travers. “Investors want more diversity and more options when allocating to alternatives.”
Nevertheless, the typical profile of a private equity investor is likely to remain much the same: few in number, rich in wealth and highly demanding in their reporting requirements. In public equities and hedge funds, with multitudes of investors holding very liquid positions, standardised reports are generally accepted, says Bailey at Augentius. “By contrast, LPs investing in private equity demand more, as the typical fund will have tens rather than hundreds of investors who all expect the level of attention and care that their sizeable commitments dictate.”
At least from the perspective of administration, private equity still offers a chance for specialists to thrive at a time when service provision is dominated by scale in many other parts of the investment management market.
©2015 funds europe