Private Equity Reporting: Transforming Data into Intelligence
Transparency and Private Equity are not two terms that are often associated with each other. However, a combination of investors, regulators and internal stakeholders are demanding increased access to timely information. The cost and necessity are obvious, but there are benefits that should not be overlooked.
Five years ago, the financial press was regularly covering stories about oversubscribed private equity funds. Since then, many PE firms (the general partners, or GPs), have underperformed and there has been a shift in power to the investors (the limited partners, or LPs). Facing a very competitive fundraising landscape, PE firms not only have to deliver superior returns. Data transparency and accuracy are the foundation of informed investment decisions.
The interest in this topic is apparent from the tremendous success we had in a recent survey with Private Equity firms on data management. TABB Group conducted a survey of 119 senior PE executives across the US, Europe and Asia. Nearly a third of the responding firms had Assets under Management (AuM) of over $5 billion, and covered a wide range of strategies including Buy Outs (24%), Venture Capital (20%) and Fund of Funds (17%).
The survey demonstrates the rising importance of data management to PE firms in four key areas:
• Investment decisions – more than one in four PE firms believe that achieving their data management objectives will result in at least considerable improvement to the quality of their investment decision-making.
• Investor reporting – only 23% of participants currently provide access to interactive investor reporting even though 70% say it is important to do so; one third of the firms say producing on-demand performance reports is challenging.
• Operational efficiency – 67% see operational efficiency as the most important goal of their investment management platform.
• Regulatory compliance – regulatory reporting poses a significant challenge for 39% of respondents. Only one quarter believe they have the necessary system integration.
We augmented the survey with conversations with leading PE firms to get a more in-depth understanding of how they were adapting to today’s challenges. Prioritizing investments in information systems is no longer seen as a “nice to have,” but is an absolute requirement to effectively compete in the increasingly democratized world of private equity. As the asset class continues to become mainstream, technology and information systems become mission critical. Whether deploying on premises, or leveraging the systems provided by a third-party administrator, the investments in technology are bringing these firms increased levels of operational efficiencies, enabling PE firms to quickly adapt and respond to the reporting challenges imposed by investors and regulators.
The benefits of transforming data into intelligence will not accrue to individual firms, but the industry as a whole. When LPs can more easily compare the performance and performance attribution of various GPs, the competition for assets can become more targeted at specific areas of value and differentiation. Allocations to private equity could see even further increases as some of the limitations of the asset class are resolved. A virtuous cycle of efficiency and transparency yields greater investor confidence, lower cost-to-income ratios and a stronger competitive environment. These will be the just rewards for PE firms that not only make the right investment decisions, but also the right investments in their own business.