It’s not just performance that matters in private equity and real estate

June 2015 | EXPERT BRIEFING | PRIVATE EQUITY

financierworldwide.com

Recent surveys have found that investors are not just looking for investment performance; operational excellence and transparency are also critical to an investor’s investment decisions. But for many firms this is hard to achieve.

A recent global EY report on the industry showed strong investor demand for the asset class, with 46 percent of investors looking to increase allocations, 46 percent intending to maintain current allocations, and only 4 percent planning a decrease. The EY report also showed that after performance, 49 percent of investors cited ‘operational excellence’ as one of their most concerning factors and a determining factor in the investment decision. The ‘Madoff’ scandal has certainly raised the bar on transparency and clarity issues.

There are currently 2252 funds seeking to raise money, according to recent Carlyle data. This is indicative of a fundraising environment which is competitive to say the least. Recent SEC inspections and the exposure of certain fee arrangements have also highlighted to investors the need for detailed due diligence processes. Currently 66 percent of managers believe that transparency of reporting should improve and managers that can exhibit high levels of investor transparency will score highly with investors. But transparency itself creates issues for managers, not only in terms of the quantity and depth of data that needs to be collected, but also in terms of the frequency with which both investors and regulators are demanding information.

Another industry survey, which polled more than 200 GPs and LPs across more than 20 countries, reports that some GPs have received more than 9000 LP enquiries in a single calendar year. Additionally, it notes the disparity between what LPs want and what they’re actually getting – 90 percent of GPs surveyed said that they provide their investors with all the information they need, a reality that less than half of LPs agreed with. This disconnect is down to the nature of private equity and real estate investors and the size of the allocations they commit to funds. In public equities and hedge funds, with their multitudes of investors holding very liquid positions, standardised reports are generally accepted. But of course LPs investing in private equity or real estate demand more. 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.

Improving the timeliness of reporting solves this challenge to some extent. But more difficult is serving the growing number of LPs that want to dig into fundamental financials at the investee level. For the large GPs with sophisticated back office functions, this poses an operational challenge, as more resources will have to be channelled to reporting processes and data collection. In addition, and as the industry becomes more regulated, regulators are demanding more information and more detail about funds – and these demands are only likely to increase in both frequency and detail going forward. Investment in new systems and internal changes are likely to be necessary, generating the potential for considerable costs. For mid-size firms, however, these requests can prove almost insurmountable across a diverse base of LPs, as may be the cost of installing and operating enhanced technology.

Standardisation in the data collection stage of reporting certainly has a role to play here. Reliance on manual processes is no longer sufficient. Technology that can source and collate data quickly and easily is of paramount importance for funds that need to process LP requests effectively. To meet the increasing regulatory demands the technology will also need to be able to collect the information and deliver it electronically, to multiple regulators and in different formats.

For investors, the standardisation of reporting is not enough. The age of the pdf is dead. Investors increasingly require tailored reports, in a format that can be automatically downloaded to their own systems. This will become the norm as LPs start to dig deeper into company-level data across their private equity portfolios. In fact, standardisation is only one step in the process to developing more customised solutions.

LPs 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.

Increasingly, different information needs to be collected and provided to regulators. And as the industry becomes more global and funds marketed across multiple countries, so reporting needs to be provided to multiple regulators, often in multiple formats.

Without a function – either outsourced or in-house – that has the time and resources to tailor reporting to individual investors and regulators, GPs will lose a key element of differentiation against their competition.

Private equity and real estate will always be a bottom line business, and LPs will always clamour to get into the highest-performing funds. But GPs that can supplement performance with sound operational processes and a tailored reporting function that adds value to LPs’ investment process, whilst meeting their regulatory requirements in an efficient manner, will position themselves well in the competition for capital.

Ian Kelly is the chief executive officer of Augentius Group. He can be contacted on +44 (02)0 7397 5465 or by email: ian.kelly@augentius.com.

Ian Kelly

Augentius Group