Tue, 28/03/2017 - 13:47
Alternatives have become a more mature option for institutional allocators, yet the reporting obligations fueled by the constantly evolving regulatory landscape has become a challenge for a large number of alternative fund managers.
Whereas a decade ago, alternative fund managers could get away with basic investor reporting, delivered almost as an afterthought, in today’s marketplace the frequency and level of reporting detail that investors expect has risen substantially. This applies to all alternative products, not just hedge funds, as institutions look to gain a clear handle on how their entire portfolio is performing.
In Ernst & Young’s 2016 Global Hedge Fund and Investor Survey, 69 per cent of institutions said they planned on increasing their target allocation to hedge funds over the next three years. Managers who focus on investor reporting as a differentiator could fare better than their peers who treat it less seriously. Some 41 per cent of investors said that they focus on funds that provide customised transparency/reporting.
There is no doubt that investors want managers to be more responsive and forthcoming with the information they report.
Speaking at the Cayman Alternative Investment Summit in the Cayman Islands last year, Sean Donohue, Head of Valuations, Apollo Global Management LP, said that investors were getting smarter and more involved in the valuation process. “They are no longer just taking the GP’s word for it. There are more due diligence meetings. For example, they want to understand the differences in valuations between a target company with 8x EBITDA and a comparable company that has 10x EBITDA,” said Donohue.
From a regulatory compliance perspective, the way that fund data is captured and presented to the various stakeholders – tax authorities, regulators, investors – is a detailed, quality control exercise. Previously, this issue would have been tackled in-house, with managers committing large IT budgets to developing new solutions. Now, outsourcing has become the more preferred option, allowing managers to leverage their service providers and avoid having to continually invest in reporting software.
“A key question GPs are asking themselves, is ‘What is our overall data strategy?’. The reporting requirements of institutional investors have changed and to meet these needs, a GP needs to have the operational infrastructure to deliver timely, accurate investment data. As GPs have a broader range of products, complex strategies and liquid and illiquid portfolios, having easily accessible quality data will help them to meet the needs of their investors,” says Richard Harland, Head of EMEA Sales, Business Development and Relationship Management at SEI.
“Investors are increasingly seeking a holistic view of their investment program, so for the individual manager, it’s about having the right data strategy and systems to deliver the right level of detail to their investors, in the format they ask for.”
When an investor is looking to allocate to a private equity fund, they will embark on a careful due diligence exercise to gain an understanding of what that GP does and how they might become a good investment partner. With the majority of new assets going to the largest, most successful PE firms, those who are fighting to win new capital are thinking about how they can best present themselves to prospective LPs.
“Private equity managers are paying closer attention to what the client experience is like during the fundraising stage and what they can offer, in terms of the overall toolkit, for communicating and interacting with investors,” says Harland.
Larger institutions are more comfortable with the idea of less frequent reporting on their illiquid asset allocations. They will tend to have experienced teams that understand the reporting cycle and in turn, will internally report precisely what the expectations are for long-term investments such as private equity, real estate and infrastructure.
“We do work with some institutional and family office clients where they don’t have a separate desk for each of their allocations; private equity, private debt, hedge funds etc. They typically have a smaller team which is responsible for looking after all their alternatives allocation. Oftentimes, they need to become accustomed to the nuances of investing in PE and understanding the unique reporting cycle. They tend to want more frequent reporting to match the reporting cycle of other areas of their investment program (mutual funds, long/short equity funds etc.).
“Even when there is very little or no change in long-only data quarter-on-quarter, as long as they can still access investment information at any time, they can compile a summary report for their overall investment program. That is where PE managers need online investor reporting solutions in order to give these investors access to the requisite data,” explains Harland.
Indeed, the CIO will likely not be satisfied if the analyst only has the numbers for the previous quarter; they will want up-to-date numbers, regardless of whether the investment has changed or not. Even though the allocation to private equity might be small in comparison to the entire programme, it is still going to be a significant amount of capital.
“On that basis, they don’t want to lose sight of any information that could impact the way they view that investment. Depending on the size of the LP’s allocation to alternatives, this will drive what data requirements they have and the frequency of reporting they expect from the GP to keep a handle on risk or performance metrics that they want to closely monitor,” adds Harland.
He estimates that there has been an overall increase in the level of fund reporting detail that LPs desire. This, in part, is being driven by the ODD process when selecting a GP: what data are they presenting and does that fit with the LP’s outlook for the way they want to analyse their investments? How will that data be captured and presented?
“GPs are having to think more carefully about the overall investor experience,” states Harland. “The shift in technology and the availability of solutions is becoming a differentiator. One of the key results from applying that technology is that it makes more accurate data available in a more timely fashion to a larger group of interested parties and constituents.
“The type of technology solutions in place, the data strategy, and how it is delivered - through reports or data feeds or both - are becoming increasingly more significant in an institutional investor’s appraisal of a GP.”
Some of the most innovative PE firms that are looking to offer a more diverse range of products to investors (including liquid alternatives) are not ignoring the technology changes taking place today. Rather, they are embracing these innovations and improvements, looking for ways to use next generation technology throughout every part of the firm.
“Private equity managers are acknowledging the changing needs of LPs. They are looking closely at their existing operating platform to make sure it can meet those needs from a reporting perspective.
“Especially as PE and hedge fund managers start to roll out innovative products such as hybrid funds, where they are having to report on a mixture of liquid and illiquid assets, it pays to partner with firms such as SEI who understand data strategies intimately and how to compile and present data effectively,” concludes Harland.
As alternative fund managers fight for investor dollars, demonstrating the ability to provide an effective data strategy and reporting programme could go a long way to helping them stand out from the crowd and meet the ever-changing expectations of institutions.