The surge of capital flowing into illiquid alternative assets highlights the need for transparency in investor reporting, but this great opportunity also remains one of the greatest challenges for the private capital markets, says Anne Anquillare, CFA, CEO and president of PEF Services.

By Joe Parsons April 15, 2020 11:38 AM GMT

Sponsored by PEF Services

Why does the need for transparency still dominate the conversation around investor reporting?

Across all investor types, transparency is one of the most important capabilities a firm can demonstrate. There is a prediction of a dramatic increase in capital flowing into illiquid alternative assets and those in a position to capitalise on the influx will be those that are capable of demonstrating the kind of transparency that investors are now demanding.

In the last decade, general partners (GPs) have done a great job communicating portfolio-level information, where investors expect some diversity. Achieving the right level of reporting transparency, where investors expect standards, still challenges many private equity firms.

The entire industry is maturing and investors are definitely raising the bar. Consistently high returns and the potential for alpha are attracting a wider range of investors and elevating the reputation and visibility of the illiquid alternative asset class as a whole.

Different types of investors are accustomed to the standards and reporting that are used by the major asset classes – which illiquid alternatives are not at present – but if we want it to become a major asset class and have access to all that capital then we need to have standards, transparency and reporting.

Without industry-wide adoption and standards capital flows will be very asymmetrical. This will make it much more difficult for smaller, newer fund managers to enter into the fund market, and that is the lifeblood of illiquid alternative assets. We need new rounds of managers coming in, finding the pockets of opportunity and really bringing those outsized returns to our asset class.

Otherwise, this imbalance will increase the ‘haves’ and ‘have-nots’ making it hard for new entrants to get into the business if they can’t easily adopt standards and transparency in investor reporting. They will quite simply be shut out of that capital.

Why do investment firms struggle to meet those expectations?

At a macro level, the private capital market as a whole is being held back by the lack of a consistent standard of reporting that makes it difficult for investors to compare performance and firms within the illiquid asset classes. It also delays investment in supporting technology. Not all have the technology to support effective reporting, for example connected to data using an investor portal. 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 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.

There has been an explosion on available data in the illiquid asset class.

What we need are methods to provide data visualisation and the ability to self-serve down to the underlying data. The issue isn’t that we don’t have the data, we’ve crossed that bridge and firms have an enormous amount of data, but the next step is how do we easily convey that data in a way that investors find useful. That’s the next step in the evolution of this industry.

What role would universal reporting standards play in achieving transparency?

You’ve traditionally had different industry groups doing their own thing within the illiquid alternative asset class and it’s only been in the last few years that those groups have come together and realised that we’re all part of this same illiquid alternative asset class and we’re still a minority when it comes to the global portfolio allocation.

It’s important to remember that one person’s standard is not a industry standard. Without standards, the technology solutions cannot develop. It’s very difficult for a technology provider to invest in a system when the standards are in flux; in that case you’re trying to hit a moving target.

This is where we saw real growth in the public markets with regards to the availability of data and how that really transformed the ability for so many investors to partake in it. Once the standards come into play the technology follows soon behind.

There’s definitely an increased awareness from many in the industry, not just the services providers, but the fund managers, the investors, the associations. But we’re tired of talking about it and we want to get something done.

There’s an understanding that the standards need to work for all sides. There’s an understanding from the standard setters that they have to take into account the ease of implementation to get to that critical mass of adoption. Ultimately, the easier it is to implement, the higher the level of adoption.

What advances have we seen with regards to standards this year?

The global standards that are transforming the future for GPs and LPs are GIPS® (Global Investment Performance Standards) and the ILPA fees and expenses template. A new version – 2020 GIPS – was recently released to improve adoption – especially among alternative asset firms – simplify the standards, and reduce compliance costs.

Its value to the alternative asset community is evident in the restructured standards that better represent the illiquid closed-end group of assets such as the use of pooled funds versus composites.

With this revision and broader use of the standards, advisors are now able to assess all types of investments—including real estate and private equity— and start developing appropriate benchmarks and more universally available databases.

The GIPS Standards are built on the framework of fair representation and full disclosure in an attempt to provide prospective investors with a direct comparison when reviewing the investment performance of potential asset managers.

Remember that these are standards, not laws, and there are a few ways to work towards GIPS compliance. A good place to start is to understand the framework.

What’s the opportunity for private capital if they adopt the reporting standards?

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. And these standards are being released at a time when investor interest is soaring higher than ever before. The convergence of highly motivated investors and a newly transparent illiquid investment landscape holds a promise of unprecedented growth.

While ILPA provides in-depth guidance on reporting to investors, GIPS offers a baseline for reporting transparency that is easily achieved.

If a firm currently doesn’t adhere to the GIPS or ILPA standards, they should consider beginning their journey by aligning their performance reporting with the GIPS standards.  In either case of GIPS or ILPA, talk to your investors and determine whether more detailed reporting is a priority for them.

To position themselves advantageously during this pivotal moment in the industry’s development, investment firms need to take steps now to develop the processes, capabilities, and technologies required to adopt these new reporting standards.

Where would a firm start to comply to achieve transparency?

We as a firm heavily support the GIPS – the standard used by all the major investment asset classes. In the past illiquid alternatives – especially private equity – has been excluded from it because it didn’t fit very well with our asset class. But with the recent changes to the standard, one of the goals of the revision was to increase the adoption by illiquid alternative assets firms and investors. They have brought in industry experts to their working group, in order to achieve that goal. They are committed to serving the investor as well as the investment firm, and what they’ve come up with is pretty easy to implement.

The argument that private equity has used in the past was that it wasn’t relevant and it was too difficult, but now both of those have gone away.

With more types of investors in the industry today, investors are placing more pressure on in-house and outsourced back-office teams to provide the services and technology platforms that deliver greater transparency, visibility and accountability.

A technology foundation that supports this reporting is required, whether firms adopt it in-house or outsource investor reporting. If it’s the latter, they need a partner capable of delivering the highest levels of service and compliance and one that offers portal technology that will enhance and streamline investor communications – more but easier.

We want to see that growth in the market and we want to help make that happen by supporting our clients in their adoption of these standards as well as providing the technology. It’s great to have all this data, but if you don’t have the technology to serve it up in a humane way with the visualisation as well as the self-serve then the data itself is not that useful.

We’re focusing on helping our clients get to that next level with their investor reporting, get that access to capital and really provide that transparency in a very thoughtful and cool way through the technology.

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