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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 alternatives, 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% 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. This is backed up by another of the survey’s findings: namely that 69% of managers running less than USD2 billion in AUM cited asset growth as their main strategic priority. Some 41% of investors said that they focus on funds that provide customized transparency/reporting.
There is no doubt that investors want managers to be more dynamic 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. 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 software 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 has 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, 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 likely to need a holistic view of that 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.”
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.