A survey carried out earlier this year by Intertrust Group and Global Custodian set out to explore the attitude of private capital fund CFOs to the growth of new data and reporting requirements by both clients and regulators (see Global Custodian Spring edition). A subsequent webinar brought together a range of industry experts to consider how CFOs can address these issues.
Discussion ranged over the nature of the data challenges faced by these CFOs and the steps they could take to meet them. Maqbool Mohamed, CFO and COO at Clarion Partners Europe, a real estate fund manager, pointed out such pressures vary, depending on the type of fund as well as the firm running it. For an investment manager that is part of a larger financial institution, for example, the CFO role has a significant amount of corporate reporting around the assets in which the fund is invested.
“If you’re part of a larger financial institution, they will give you the resources you need, because they have all these internal requirements that they want you to meet,” Mohamed noted, pointing out, however, that the role can have different meanings in different firms. “It could be purely finance and accounting focused; it could be more involved with debt financing, investor relations, strategic initiatives, or a combination of any of these,” he said. “If you’re with a large corporate investment manager, reporting plays a big part in the CFO function and, of course, data is important for the CFO too, let alone investors. You need to understand the data and make sure it’s accurate, so you can make the right decisions. In my current role in a slightly smaller fund manager, it’s a top five concern.”
For Chitra Baskar, chief operating officer and global head of funds and product, Intertrust Group, a definitive and clear push towards greater transparency and more information is evident in the face of changes in market structure. “With separately managed accounts comes the need for more oversight,” she suggested, adding that the private capital world is following trends among liquid alt funds, which she saw as continuing to move in the direction of providing greater comfort to investors.
This was confirmed by Patrik Burnäs, head of fund operations at Stockholm-based EQT. “The number of side letters and the bespoke requests coming with investors on the reporting side have definitely increased in the last couple of years,” he agreed. “The fund investors meanwhile are themselves facing increasing pressure in reporting internally, but also in showing that they are paying attention to the growing compliance function.”
In such a context, what is the data that is now being required? Burnäs identified a number of “megatrends”, one of which is the need for data on ESG and diversity and inclusion, where demands for information will only grow, alongside regulatory reporting requirements. Mohamed meanwhile pointed to a big increase in the last 10 years in debt reporting. Investors want more detail on a fund’s debt, “to make sure that the levels are acceptable, but also that you’re not artificially driving returns.”
The role of technology
Does the availability of technology to deliver more sophisticated data sets itself influence demand? Cyril Demaria, affiliate professor at French business school EDHEC, drew on his prior experience at the sharp end of the industry to respond. “It’s a bit ‘chicken and egg’,” he observed. “Back in 2005, when I started to work in fund of funds, one of the biggest concerns we had was to be able to report non-performance data to our investors. We wanted to know the net new jobs being created by the underlying businesses and it was very difficult to collect this kind of information. Then as time went by, we started to get more and more data.” At a certain stage firms are then confronted with the risk of information overload. “Some fund investors might argue that today, they’re drowning under a wave of reports that they’re having trouble processing,” Demaria contended.
At the same time, he pointed out, fund investors are heterogeneous: “What they pay attention to depends partly on their geographical region, but also the nature of their liabilities and time constraints. If you’re an insurance group, you need to deliver your own report fairly quickly after the year end. And if you’re a family office, you’d rather wait a little bit longer, but process information only once. That poses a challenge to the fund managers to provide information fitting both sets of requirements without duplicating the work.”
Picking up on the topic of ESG, Mohamed suggested that it provides a good example of the different pressures that private equity firms face. “In our space in real estate, we basically report on energy efficiency; we don’t have companies with people,” he said. “I think ESG reporting requirements for corporate private equity are much more elaborate.” Demaria noted that ESG reporting is also subject to geographical discrepancies. “The concept might not be interpreted in the same way, for example, in Europe and in the US. There are some things that an American LP might require, that it is not actually legal to ask for in other jurisdictions.”
Addressing the challenge
Faced with this array of differing data and reporting pressures, how are CFOs preparing to address them? Across the industry there is work to be done. “When I joined this industry 10 years ago, it felt from a technology perspective, like going back to the ’90s coming from the banking industry,” said Burnäs. “A lot of Excel, a lot of manual work. No single source of truth. Clearly the technology available today helps us to catch up, but we’re not there yet.”
A private fund seeking to upgrade its data and reporting capabilities essentially has three options: hire more staff, expand its technology framework or outsource. Are those seen as alternatives or must progress be made on all fronts? For Demaria, outsourcing is only an option if you have your house in order. “You can’t outsource a problem,” he stressed. Mohamed detected a series of swings in this regard over the years. “I’ve seen different phases in the last 20 years,” he noted. “At one time, outsourcing was widely accepted, then after 2009, 2010, a lot of processes went back in-house. Now they are outsourced again, with some of this being linked with compliance and regulatory requirements.”
Clearly this is not an irreversible decision. “There are larger funds, which begin by investing in their own back offices, accounting and technology, mostly because private capital is a complex asset class,” said Baskar, “and at some stage, it just becomes too unwieldy. Costs blow up, you run huge teams, and you can’t keep pace with technology changes.” There are also geographic constraints: if a fund is invested in multiple jurisdictions, said Mohamed, “Unless you’re going to open up offices in all these countries, you’re going to have to outsource some aspects of your operations.”
In addition, Demaria noted, high quality information is expensive to produce. “When you’re a listed company, you produce it, because the regulators tell you to do so, but when you’re investing in venture capital and in start-ups, the budget required for this level of reporting is often out of reach,” he commented. “I’m not sure we will ever get to the point where we can be as efficient as a hedge fund manager in producing timely and frequent information, but we can aim for that.”
Panellists accepted that the nature of the investments undertaken by private capital funds as opposed to hedge funds would always have an impact on the type and frequency of information that could be made available to investors and regulators, since the former are not dealing with assets typically subject to overnight valuation. Nevertheless, Baskar concluded, while it may be impractical to expect the equivalent information turnaround and transparency from both illiquid and liquid managers, that does not absolve private fund CFOs from providing their investors with the best data their technology – or that of their service providers – can offer.
