By Anne Anquillare, CFA,Chief Executive Officer & President, PEF Services LLC
Newly developed universal reporting standards are promising to take private capital’s most urgent challenge—the lack of transparency—and solve it once and for all. Sound familiar? Will this time be different? And if it is, is my firm ready? And if it isn’t, shouldn’t my firm be ready anyway since eventually it will happen?
For investment firms whose accounting systems aren’t configured to support the new performance reporting standards, and for those who rely on spreadsheets as their system of record, complying with the new transparency standards required by 2020 GIPS® and ILPA can be costly and challenging.
Spreadsheet-based processes are manual and time consuming, and they are difficult to scale in order to achieve the depth of reporting required.
Previously, firms were hesitant to invest in technology due to a lack of standards (hard to find robust solutions without them). But now, with the convergence of standards, the time is right to invest in technology that supports greater detail and transparency, whether that technology is maintained on-site or provided as part of an outsourced fund administration solution.
Transitioning from spreadsheet-based systems and investing in a structured, centralized platform that supports and automates the collection and distribution of data required by ILPA and GIPS standards is a common first step for a firm.
Whether you plan to keep the process in house or outsource it, look for technology platforms that support the collection and calculation of these 8 performance reporting foundations to position your investment firm advantageously during this pivotal moment in the industry’s development.
Look for platforms that support the collection and calculation of:
1. DPI (distributions to paid-in capital), RVPI (residual value to paid-in capital), TVPI (total value to paid-in capital, which is also the combination of DPI and RVPI), and IRR at both gross and net levels.
2. Details for capital calls, including the name of the investment, type of expense, and impact to unfunded commitment.
3. Details for distributions, including breakout of interest on subsequent closings, income, realized gain, return of capital, and carried interest if the distribution (or a portion thereof) is recallable, ensure that its impact to unfunded commitment can be recorded.
4. Gross management fees, management fee offsets, waived management fees, and management fee rebates.
5. Expense details, including (at minimum) advisory fees, broken deal expenses, director fees, monitoring fees, and placement fees.
6. Carried interest (accrued and paid) and claw backs (potential obligation and amounts returned).
7. Fee and expense details including allocations to related vehicles and reimbursements.
8. For fund of funds: management fees, including the details above, plus fees and expenses details, carried interest (accrued and paid) as well as performance metrics for the underlying funds.
The transparency standards that are being set by The CFA Institute with 2020 GIPS® and other industry reporting templates are the key to the future for private equity and other illiquid alternative asset firms, and the firms that prove themselves capable of adhering to those standards will surpass those that delay their journey toward compliance.
To learn more about the emerging global standards that are transforming the future for General Partners, please read The New Era for Performance Reporting.