Industry pressure for greater transparency may lead to standardisation of private equity reporting, investors and industry bodies indicate.
A “non-commercial” approach is needed to data sharing between general partners (GPs) and its investors, limited partners (LPs), according to Lorelei Graye, founder and president of the Adopting Data Standards (ADS) Initiative, an industry group working to standardise GP-LP reporting and develop common data standards.
“ADS is not prescribing what must be disclosed; we are creating the common language of what might be disclosed,” says Graye.
“We have to take a dual approach and look at this with two mindsets. One is investors – they need to solve their immediate needs to do their jobs. They must be able to slice and dice their data. They need it granular, they need it comparable, and right now that takes a lot of energy to normalise or cleanse that data. But they also should focus on what’s going to change that. You can’t just provide a stopgap, you actually have to have a path forward.”
The private equity industry currently lacks a standardised process for fee and performance reporting, as well as a common standard for data exchanges between GPs and LPs. Last month, investor Allianz SE came out in support for ADS in an article for the Wall Street Journal, urging GPs to standardise.
Yet Graye advises against placing investors and GPs in opposing interest groups. Enforcement of standardisation cannot be led by investors.
“It has to be a cross-collaboration with representation or input from the different stakeholder groups. It cannot be a one-sided effort because GPs have a very valid position on standardised reporting,” says Graye.
“From the GP perspective, they feel like their back-office burden is increasing. From their perspective, there is a proliferation of templates and bespoke requests that are burdening them. And they feel like new efforts are more of a plus-one to them, not a replacement, which is exactly the opposite goal of good efforts in the past.
“The GP message is very palatable. And the reason we’ve been able to strike just the right note of balance is because we’re saying ‘your complaints are valid too.’ We’re addressing those because we realise that a GP needs an opportunity for back-office efficiency to participate, so there should be enough LPs who have signed on – not to force the issue, but to be able to present a logical business case for GP adoption.”
Private equity firms currently enjoy the freedom of negotiating fees with partners, and some believe standardisation would be restrictive.
“[The Small Business Investor Alliance] (SBIA) is composed of both the GPs and LPs of private equity funds. Fees are freely negotiated, so the best practice is for all terms to be clear to both parties and mutually agreed upon,” said Brett Palmer, SBIA president, in an email.
“There is no need for a rigid, one-size-fits-all regulatory model that would remove the ability for investing professionals to negotiate terms.”
A self-regulatory model is currently in use in the UK. Private equity firms are regulated by the Financial Conduct Authority (FCA) and are subject to the Private Equity Reporting Group’s (PERG) Good Practice Reporting Guide, a self-regulatory regime implemented in 2007. However adherence to the guidelines is not mandatory. PERG’s 2019 report demonstrated a significant drop in firms publishing disclosures “to a good standard,” with 53 percent in 2019 compared to 73 percent in 2018.
In the US, 2010’s Dodd Frank Act requires firms to register with the Securities and Exchange Commission (SEC), though the complexity of asset valuation and laxness of reporting makes private equity firms notoriously opaque.
“ADS is not stepping in like a regulatory body and to define reporting requirements. We want to define anything you might exchange between the GP and the LP,” says Graye.
“I think that the regulators will likely play a role in the future. But the ADS goal is to help the industry bring forward the best solution, rather for a regulator to define that for us.”
ADS’s full membership, which include Allianz SE, will be disclosed later this year.