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Joseph Henkel, SEI

PERE funds and Annex IV reporting


Demands and nuances of Annex IV reporting across Europe could lead to a steady adoption of an outsourcing model among PERE fund managers.

Private equity and real estate (PERE) fund managers are having to adjust quickly to life under the AIFMD, specifically in relation to Annex IV transparency reporting. The majority of managers will have gone through their first iteration at the end of January 2015, and depending on the size of assets under management, AIFMs face the prospect of filing on a semi-annual or quarterly basis; this drops to annually if the manager is considered de minimis by running less than EUR100 million in assets.

Annex IV requires two reports to be filed; one for the AIFM, and one for the AIF being marketed into Europe. This makes for a highly complex and detailed reporting process. The report contains 302 data fields for each AIF, whilst AIFMs themselves are required to complete 38 data fields and answer 41 detailed questions. Just to add to the pressure, the report has to be filed within 30 days.  

“Whereas Form PF is based upon fiscal year end, Annex IV is based on calendar year. For Non-EU AIFMs, they are required to file Annex IV with each member state that they are registered to market in and each member state can have different reporting in terms of format (Excel vs XML), version (ESMA guidance 1.0 vs. 2.0) and delivery mechanism (email, online reporting tool), which managers need to be mindful of,” says Joseph Henkel (pictured), part of the Global Solutions team at SEI’s Investment Manager Services division in Dublin. 

There is a combination of factors that PE managers need to look at to determine the frequency of reporting, consisting of the following:

• Regulated Assets Under Management at AIFM and AIF level
• Use of Leverage
• Types of Investment

Broadly speaking, the frequency of reporting can be broken down as follows:

Manager AuM is EUR100 million – EUR500 million (unleveraged): Semi-annual 
Manager AuM is more than EUR1 billion: Quarterly 
Any single AIF exceeding EUR500 million:  Quarterly 
De minimis managers with less than EUR100 million: Annually

What this means is that the AIFM could find itself reporting its own data at a different frequency to the AIFs under their management. For example, a US private equity manager might have USD10 billion in assets, requiring a quarterly filing, but they might only be marketing a EUR500 million AIF, which would be subject to a semi-annual filing. Point being, managers face a significant compliance challenge keeping on top of these reporting obligations. 

Unlike hedge fund managers, who have become acclimatised to regulation through their Form PF obligations, for PE houses this is a whole new ball game. “Many of the managers we interact with have found the regulation challenging to their operating model and the audit and legal firms we work with have indicated that they were relied on heavily for assistance in providing guidance on the regulation,” says Henkel.

The complexity of Annex IV for PERE managers results in the fact that little guidance was provided specifically on PERE assets. Many of the questions are geared towards hedge fund managers or their providers, requiring PERE managers to make critical assumptions.  

As the first filing for many PERE managers was due 31 January 2015, they had no time to submit the Annex IV report using accurate Q4 valuation data. Consequently, the initial filing was based on September valuations. According to Henkel, a second, more up-to-date report based on December’s valuations, was then filed in February. 

“We did not encounter the same issues with these amended fillings. This could have been due to the focus of regulators to fix the issues they encountered in January or to the lesser number of re-filings that were required,” says Henkel. 

This is just one example of how assumptions are making Annex IV such a minefield for managers to navigate through. Henkel confirms that for one mid-sized client, approximately 60 assumptions had to be made. These assumptions, says Henkel, are being used as a way to communicate to the regulators, ‘This is what we have done, this is how we have done it, and this is the data we have used with as much due diligence and care as possible’.

Many PE houses still do their own internal administration, often using Excel spreadsheets. 

Admittedly, on the data aggregation side, PE managers typically are not going to find this quite as burdensome as hedge fund managers due to the fact that their portfolios are not comprised of hundreds, if not thousands, of financial instruments being regularly traded.  

Nevertheless, they still have to be able to extract data on each investment within the private equity vehicle and disclose various aspects of these investments within the reporting framework. 

In a regulated environment, therefore, reliance on manual processes is set to become a lot harder. If a regulator comes in and asks the manager to provide an audit trail, the PERE manager is going to have a hard time doing that if they are still using a set of individually-prepared Excel spreadsheets. 

Some industry commentators believe that having gone through the pain of filing their first Annex IV report, PERE managers will begin to move towards an outsourced model approach. Again, doing this – just like outsourcing the fund administration function – will require a shift in mindset among these firms, where control and keeping everything in-house has long been the norm. 

“That’s something that we first saw with our Form PF solution. A large percentage of clients took it upon themselves to do the first reporting cycle internally to determine what was needed and find out what was involved.  What they found was how painful it was to complete, and that led to our getting a 200 per cent increase in the number of clients between the original filing in December 2012 and the December 2013 filing,” confirms Henkel, adding:

“We are starting to see a shift with PERE managers who were previously completing administration of their funds in-house to moving to an outsourced model, but this continues to be a slow change.  While we are a full-service administrator, we can also provide Annex IV services as a standalone technology and service without administering their funds.”

Another factor that might push PERE managers towards an outsourced Annex IV reporting solution is the fact that they must also appoint an independent depositary. By offering both services as a value-add, administrators such as SEI are hoping to support the PERE community as they adjust to this new life of regulatory oversight.

In the UK, the FCA uses Annex IV version 1.1. whereas the rest of the EU uses Annex IV version 1.2. This is not, in and of itself, a major burden but in conjunction with the level of detail that needs to go into the report, and the 30-day turnaround, making sure that internal compliance and operations teams have a clear reporting schedule and that the right templates are being used, requires robust, automated workflows. 

This may be not be a problem for the very largest managers, but it could cause issues for smaller fund houses who simply don’t have the infrastructure needed to operate in this new regulatory era.    

Master-feeder look-through requirement

One key issue with Annex IV that needs clarifying is the master/feeder look-through requirement. Under article 24.2 of the Directive, the reporting obligations apply only to AIFs that a manager markets into the EU. Most managers market feeder funds but the aim of Annex IV is to capture systemic risk by receiving details on the fund’s trade positions, leverage, counterparty relationships etc; basically, all the key information that resides in the Master Fund.

Speaking with Hedgeweek, Dan Connell, President at New York-based ConceptONE LLC, which specializes in regulatory and risk reporting, the only Member State regulator that has provided clarification on this is the FCA. 

“They have instructed EU-based AIFMs to look-through into the underlying investments of the Master Fund. Non-EU AIFMs have no such requirement. Germany and the Netherlands have publicly stated that they will not expect look-through whilst Belgium has stated they expect both EU and non-EU AIFMs to provide look-through,” says Connell. 

This further compounds the complexity of Annex IV and illustrates how EU regulation creates a degree of heterogeneity that one simply does not get with Form PF and CPO-PQR regulation in the US. 

“Everything in Europe, from usernames and passwords to what version of XML needs to be used for the Annex IV report is up in the air, decentralised and as a result quite disorientating for managers,” states Connell. 

As managers go through a few iterations of Annex IV things will get easier, especially as regulators start to give feedback to PERE managers on the quality of data they are receiving, and where updates to data fields will help to bring additional clarity. 

To what extent PERE managers decide to go down the outsourced model remains to be seen but for those that do, firms such as SEI are well prepared to support them. Given the myriad of complexities of Annex IV outlined above, for example, SEI has built a Global Regulatory Reporting service to offer a one-stop shop solution to overcome those challenges. 

As a final thought and piece of advice, Henkel says that managers should consider the following points when researching potential outsourced partners:

• Technology and Support – Many providers will offer downloadable software but no ongoing support. Alternatively, they may provide raw data files but no integration with the forms themselves.  

• Staff – Who is providing the service?  Are their services bundled within operational groups or handled by specialised regulatory services team?

• Robust Capabilities – Managers should look for providers who can service various regulations around the world, not just those that immediately affect them: Form PF, Annex IV, CPO-PQR, FATCA, etc. 

• On-going support – As the regulatory environment continues to evolve service providers need to ensure they are constantly engaged with the regulators to ensure their technology and support evolves along with, or even ahead of, those changes.

The bottom line is this: PERE managers need to look for a partner that has a good mix of technology, in-house expertise and a robust operational infrastructure. This is to help ensure that any level of regulatory, investment operations or fund administration outsourced can be done accurately, efficiently and on time. By doing so, it will help provide PERE managers with a degree of comfort and confidence that allows them to focus on investment selection, portfolio construction, and investor servicing. 

Contact SEI

To learn more about how we can help you, please contact us at our main investment operational centres:

London

SEI Investment Manager Services 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, United Kingdom
Tel: 44 (0)20 3810 7570

Dublin

SEI Investments – Global Fund Services Limited SEI Investments Trustee & Custodial Services (Ireland) Limited Styne House Upper Hatch Street Dublin 2 Ireland  
Tel: 353 1 638 2435

US

SEI Investment Manager Services   One Freedom Valley Drive Oaks, PA 19456 USA   Tel: 610 676 1270   777 Third Ave 26th Floor, Suite C New York, NY 10017 USA   Tel: 212 336 5300

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