Behind the Headlines
Limited partners’ push for transparency yields better results
Week of December 17, 2018
Private equity and other alternative investment funds that provide the most transparency to limited partners are also the best performing, according to a study released earlier this month by software provider eFront on the reporting practices of 1,800 funds that invest in private markets.
A report on the study by Institutional Investor notes that general partners providing standard, highly detailed reporting templates have internal rates of return that are 10.2% higher than their peers. In addition to information on the asset manager, a reporting template includes a detailed breakdown of fees and portfolio companies, according to eFront.
Greg Durst, Managing Director, Corporate Development at Institutional Limited Partners Association (“ILPA”- which represents 500 public and private allocators in private equity and other alternative investments), said that ILPA members are demanding greater transparency because they need insight into manager portfolios in order to manage their overall portfolio risk.
“But that’s kind of tactical,” he said. “More broadly, transparency is important because data can help limited partners better attribute alpha creation, which helps them better allocate capital.” In Europe, there is more pressure by limited partners to find out about what’s going on at operating companies today in terms of environmental, social and governance (ESG) issues than there is in the U.S. “That’s because generally European investors are further along the ESG continuum than we are in North America, but that’s changing,” he said, observing that PE firms in the US are likely to see limited partners more concerned about corporate governance, succession and inclusion issues in the future.
For executives at operating companies, Durst offers this takeaway: “If you’re new to working with a PE owner, you may be feeling a bit under the gun about the increased reporting, and asked to add new detail to your reports,” he said. “But that’s for two interrelated reasons. The general partners are being more demanding because their investors are being more demanding in terms of reporting. And, important for both LPs and GPs, given today’s high entry multiples, GPs are using every tool they can to find to enhance the value of the business.”