(Re)building trust between GPs & LPs: navigating a murky data world

Real Deals Tech Innovation: Panel Discussion

It is no secret that the private equity industry continues to endure a lack of alignment, transparency and standardization when it comes to data and reporting. LPs are still needing to request data from GPs, while GPs are spending much of their time fielding these requests rather than focusing on higher-order tasks. Although the situation has been improving over the last decade, significant challenges remain, and there is still a way to go in reaching these goals.

As part of the Real Deals Tech Innovation webinar series, a panel of industry experts discussed the practicalities of aligning LP and GP interests, and why it is especially important in these uncertain times for LPs to have access to more transparent and timely data.

Continue reading for an overview of the key questions that were discussed.

What are the practicalities of aligning LP and GP interests to better measure and demonstrate value?

With significant lag and lack of standardization, LPs still find it challenging to collect and analyze data obtained from their GPs. As Alex Scott, Partner at Pantheon, explained, aggregating data continues to be difficult for pension funds and market participants like Pantheon: “Unless you’ve got high percentage coverage, any analysis or summaries that you can provide are going to be limited. So you not only need managers reporting to a high standard, you need almost all of them doing it to a high standard, and that is a real challenge.”

UTIMCO Senior Director Brad Thawley added that, although access to quarterly information has improved over the last decade, data availability during due diligence has not changed significantly. Although technology is playing an essential role in aligning LP-GP data interests, there is still a way to go in effectively capturing and analyzing all the necessary data. As Thawley mentioned, “most GPs are now receptive to the idea of filling out a template and loading it into a system,” especially once they better understand why the data is necessary, how it will be used, and what security is in place. In times of crisis, such as now with COVID-19, GPs receive even more questions from LPs. Greater data transparency, particularly in the current climate, would help ease the burden on both sides and, as Thawley stated, allow GPs to “focus on what they really should be focusing on, which is the management of the portfolio.”

An additional element to consider is that it is not only investors driving change but also regulators. As noted by Carla Findlay-Dons, Director of Asset Management & ESG Business Development at KPMG, when highly regulated entities such as pension schemes start investing in new asset classes like private equity, they will have increasing demands. Therefore, as Findlay-Dons stated, it’s “usually the clients and the investors who are the first to make the demand, and the regulators often follow in order to get standardization. But the more the market matures, and the more new investor types come into the market, especially regulated entities, it’s really going to push the bar to force GPs and LPs to work in the best way possible. And the best way possible is always going to be transparency, standardization and information sharing”.

Melissa Ferraz, Managing Director & Global Head of eFront Insight at BlackRock, agreed. According to Ferraz, “we should push beyond what is required to what really will continue to provide investor confidence and therefore increase allocations to the asset class, which is good for all parties in the market.”

How has the current market environment and recent SEC warnings changed your views on any data deficiencies?

Data deficiencies vary, but as the SEC has recently identified with its warnings on fees and expenses within private equity funds, there are certain types of data that LPs are struggling to receive. To reach the necessary levels of transparency and regularity, Thawley mentioned, “there needs to be consistency in recording, and it’s easier said than done. There’s a lot of complexities associated with fee offsets and carrying calculations …, and so the further we can push the industry to standardize reporting, the easier it is for LPs to answer the question about what [they’re] getting paid.”

Scott touched on how private markets face additional difficulties not seen in public markets. The infrastructure asset class alone has a wide variety of assets, from wind and solar to PFI projects. Figuring out the metrics to use for reporting and data aggregation, therefore, is an extra challenge.

Pension funds, which typically invest in various asset classes, are increasingly playing a more prominent role in private markets. Simultaneously, insurance companies that already need to abide by strict regulatory requirements enter the private markets with increasing demands. Together, this creates pressure for all participants to improve standardization and the speed of data provision, adding a layer of complexity to an already complex industry. As Scott put it, “in private equity or private markets, there is a natural reporting lag that’s built-in even before a pension fund or organization like Pantheon gets the chance to even start aggregating [the data]. So there are these huge lags as well, which are challenges and not always well understood by regulators or new participants to the industry.”

With private markets continually growing, new players entering the industry often hold different views about how things should be done or what standards should look like, which means that regulators and industry bodies like ILPA and InvestEurope are starting to play a larger role.

Findlay-Dons predicts that private equity regulations are likely to occur “by osmosis of those wanting to enter the market,” with ESG and infrastructure being the most significant catalysts. As ESG requirements rise, investors will look to private markets, and infrastructure in particular, to satisfy those obligations. To be able to do this, “they’re going to force the infrastructure deal to make sure they have data, to make sure they report, to make sure … that we’re not waiting a year between data updates. We’re actually getting them in real-time, so we don’t fall out of compliance.”

Furthermore, since these investors are typically working with a multi-asset class portfolio, more often than not, they are used to a certain level of standards that are normal for other asset classes, especially within the public market space. This means that within PE, you’re not only being compared with other PE peers but with other asset classes also. As Findlay-Dons states, to be able to drive greater transparency when looking at multi-asset class portfolio construction, “those [reporting] standards are driving whether or not you can enter the asset class. … If you have a chasm of disparity between that, it’s very hard as a regulated entity to justify the decision on duty of capacity and duty of care.”

How do you ensure that you have access to accurate and timely data to assess GP performance?

The required levels of transparency and standardization will only be possible with the proper regulations, processes and tools in place, which the private markets need to keep striving towards. As Ferraz explained, “over the last 5-10 years, the evolution and transformation of private markets has been quite rapid, but still there remains a large gap and the demands for more technology and greater depth of data continue to rise every year as allocations to private markets continue to rise.” This means that, “if private markets are going to continue to attract new money from more traditional investors, it’s vital that these investors can compare [investment] opportunities on a like for like basis.”

As this demand continues to rise, private markets need to ensure that LPs can gain access to timely data and the ability to assess GP performance. Although the industry might appear to be slow in adopting regulatory frameworks and overall standardization, the willingness does seem to be there. It is therefore imperative that, as Ferraz stated, “we view transparency and regulatory changes as they’re intended: to improve the industry and bring it more in line with traditional investments while still maintaining the nature of what makes private markets an attractive space to be in and maintain higher returns and the risk profile that it has.” She further explained that “the more aligned public and private markets become in terms of regulation, the more accessible [private markets] will become. Aligning them closer together will benefit all market participants.”

And the more accessible private markets become, the more data LPs will have at their fingertips. With Pantheon and UTIMCO being users of eFront Insight, they have observed the benefits of streamlined and standardized processes. As Scott mentioned, Pantheon implemented the software “to expand the bandwidth we have available to us to meet those speed requirements at the end of the quarter, to process this data because you’ve got these bottlenecks with the reports all coming in at once.” Thawley added, “As an asset allocator, we have essentially insatiable demand to understand risk-adjusted returns. … The importance [is aggregation and] the ability to look at it in its totality and make comparisons to what is happening versus what is normal or what is happening versus history and try to project risk-adjusted returns in the future.” He continued, “we use eFront [Insight] for a data-gathering tool, they [do] a good job of extracting information from the funds [at the asset level] and we can aggregate it and slice up that information in the portfolio.”

Although technology is essential in attaining greater transparency, Ferraz advised that “having access to quality private markets data is critical and important, but it also has to be actionable, meaning that you have to have the means and the ability to harness it.” As Scott touched on throughout the discussion, companies still need to ensure that they have the right people, processes and data in place to truly benefit. Additionally, Scott believes that technology can also act as a staff retention tool. Instead of devoting time to tasks that can be easily automated, you “can get people inside [your] firm to work on higher-order, more interesting tasks, such as enriching the data from other sources.”

What’s positive to see is that, compared with the 2008 GFC, data transparency is much higher during this current crisis. With an increase in both calls and updates, LPs and GPs are communicating at a greater level, and LPs have been receiving better disclosures than ever before. Interestingly, new data deficiencies are also being revealed to LPs that they may not have been aware of before. As Thawley mentioned, “In times like now, in COVID or other market disruptors, you find areas that you sort of lack in terms of understanding of the data. And so, on one hand, GPs are a much more open book, and they’re trying hard to have as many levels of communication that they can. But the flip side is, we realize in our systems that we have a lack of information, and it was something that was hard to project or predict.”

Beyond core fund and asset financials, have standards of reporting ESG data improved across the industry?

Although data transparency is a key issue for private markets overall, there is one area in which it could prove to be even more advantageous, and that’s ESG. When it comes to ESG, both private and public markets are grappling with a lack of standardization, greenwashing, and disparities between rating agencies. In private markets in particular, detailed data is more challenging to come by, exposing LPs to even greater reputational risk.

When discussing investing in infrastructure, Findlay-Dons stated, “If you think about it, … what’s the likelihood that you’re able to phone up a [publicly listed] company, talk about how they’re actually drilling into a piece of earth, and ask what kind of drill they’re using, or what their financing mix is? … That’s the kind of data that you could get in a private transaction that you’re never going to be able to get in the big public markets, … and without that one-on-one contact to probe, that’s where the reputational risk comes in; you’re unable to un-green wash the information you’re receiving.”

When it comes to ESG reporting, Ferraz believes that “as money moves from baby boomers to [younger generations], that transfer of wealth will start creating requirements for GPs to … pay more attention to [their ESG commitment] and … have proper reporting around it”. Even so, LPs still need to contend with the lack of standardization, which Ferraz thinks makes it difficult for them “to really know what the data means and how to use it in a way that supports their investment standards.” Ferraz, therefore, believes the challenge is less around GPs’ willingness to provide the data and more about how the data is coming in.

Although complete transparency, standardization, and alignment might still be far off, the industry does appear to be heading in the right direction. As Thawley rightly stated, “There’s no fear in truth. The faster we can get the industry to move towards the ‘eFront’s’ of the world and their peers, the better it is for the overall product and the industry in its totality.”