I was at the Muller and Monroe Back Office Exchange a few weeks ago (kudos again to M² for putting forth a great gathering with relevant topics for private equity professionals). One of the topics covered was GIPS (official name is Global Investment Performance Standards) presented by Ken Robinson, a director at CFA Institute. And, while many topics discussed by CFAs can be quant focus and rather dry, this topic elicited the liveliest discussion by our group. Why, or why now, you wonder? I think it has a bit to do with the momentum we have been witnessing over the past 4 years in our industry. The drive toward:
- Transparency (needs accuracy and consistency)
- Comparability (while alpha will never be a commodity, it does need to be demonstrated)
- Expansion of investor base (e.g. foreign, smaller institutional investors, general solicitation)
- Greater understanding of industry issues (e.g., attribution, survivorship bias, lack of comparable data, etc.)
Quick summary of the components and goals of GIPS: Input Data (consistency and FMV); Calculation Methodology (uniformity); Composite Construction (grouped by investment strategy and vintage year); Benchmark (comparison but difficult for our industry); Disclosures (comprehensive); Presentation and Reporting (following standard format).
What kind of funds are covered:
1) Under the guidance for Private Equity – primary, secondary and fund of funds vehicles investing in venture capital, buyout, mezzanine, and distressed securities.
2) Under the guidance for Real Estate – Real estate commingled funds, separate accounts, and unit trusts; private REITs, REOCs; and real estate investment vehicles where some portion of return to the investor is related to the performance of the underlying real estate assets.
What the future holds:
- While compliance is voluntary, investors and other interested parties
will push this to be mandatory for any fund raising capital. The sooner
you start to compile the required information the better.
- GIPS is all or nothing – entire firm must comply (e.g., all funds including
SPVs) and compliance must be for all applicable portions
of the standards.
Benefits of GIPS:
- Standard performance reporting across most countries that participate in private capital industry
- Developed and maintained by industry association
- As industry continues to mature and attract new investors – alpha can rise to the top regardless of the
number or size of the funds.
Hurdles for using GIPS with private capital funds:
- Very difficult to find appropriate “composite” funds (including question on definition and use of “vintage year”)
- Third party verification services can be expensive (but this should be less of an issue as data
tracking and automation improves and competition increases)
- More clarification is needed on standards for calculating gross and net returns (what is included and what is not).
So while I realize it is another acronym to add to the already full bowl of alphabet soup we are facing – I think I can see the value-add with this one.