Format standardisation next technology hurdle for GP/LP relationship
The flow of information between general partners (GPs) and limited partners (LPs) in the private equity space would be considerably improved if the industry were to move towards further standardisation of messaging formats, according to the views of Stuart Keeler, COO at eFront.
The software provider to the financial industry, particularly in the area of alternative investments and risk management, has seen the debate move on through the past half a decade, Keeler said.
Then it was concerns over transparency, and the sheer the lack of information being provided by GPs to LPs. Subsequently there have been recommendations and guidance from industry bodies such as the Institutional Limited Partners Association (ILPA). This, however, needs to go further, Keeler said.
“What we have is more standardisation, but what we don’t have is the standard.”
“The subtle difference is the guidelines say you should report this or that type of information, rather than being more prescriptive in terms of saying how you should do it.”
“This takes us to a certain level, but it means for investors there is still a lot of manual processing, and for GPs they still have to respond to lots of variations on a theme for investors.”
One upshot of the current status quo is that although larger European and US private equity investors have taken on board the recommendations and guidelines as they exist, it means that large GPs may be producing 20-30 investors specific packs of information every quarter.
For the LPs it means that if they have 2-300 fund positions, they are getting the data in 2-300 different formats, Keeler said. The result is they spend a lot of time doing something that does not add a huge amount of value – such as reformatting – just to get some sort of data into their systems.
The situation facing the private equity space stands in sharp contrast to other areas of financial services. Keeler said that, for example, straight through processing for securities trading would not happen if it were not electronic.
But the private equity space is stuck, with particpants producing pdf documents, which then require people to read and analyse the content. Larger investors may use the strength of their positions to get GPs to fill in Excel workbooks, but they then produce different workbooks for different investors, he added.
“What is interesting is that when I talk to GPs, rather than say ‘we are already doing too much reporting’, their view is ‘if you could persuade the LPs to come up with a consistent way of having data as standard, it would be fantastic'”.
This being the case, the question is whether ILPA or other industry associations can move to the next level, something Keeler hopes will happen over the next 12-18 months.
There may be certain effects on the industry of improved flow of data, Keeler said. For example, increasing ability to analyse investment portfolios and asset exposure could lead to different investment decisions.
However he warns that in the short term any changes are unlikely to help with other types of questions facing the sector, such as its response to AIFMD. Neither will it immediately change the way valuations are done.
“It’s about saying rather than send people pdf reports, send them what they want, which is data they can compare and analyse,” Keeler said.
One reason for the delay in the industry moving ahead on the issue is the additional information required compared to, say, securities trading. Unlike trading shares, private equity assets do not simply translate into a name, value date and price. That said, however, investors with large portfolios of funds need hard facts too, Keeler said.
The area of pensions may be particularly ripe to take advantage of the benefits that more standardisation of data flowing between GPs and LPs. Keeler noted that pension funds tend to have relatively small teams of dedicated private equity specialists.
“By getting data to flow electronically, it has a much bigger impact in that space.”