October 18, 2018
Since the financial crisis in 2008 Limited Partners (“LPs”) have been demanding greater transparency and reporting accuracy from Alternative Investment managers. This requirement has become increasingly important as LPs allocate more money to the private capital markets than ever before. As a result, how a General Partner (“GP”) reports its financial information and the level of transparency it provides has become an important part of a sophisticated LPs decision process when determining fund allocations.
More capital has flowed into the private capital markets than ever before – a record $5.2 Trillion allocated in 20171. With additional capital comes increased scrutiny and requirements. LPs now often spend time not only with investment partners but also CFOs, controllers, and other members of the back-office team. Investors want to ensure that a fund not only has controls, processes, and procedures in place to successfully invest their capital but also to manage, account for and distribute those dollars according to their LPA. CFO’s increasingly have to answer diligence questions about reporting from prospective LPs, including:
- Automation and accuracy of reporting
- Frequency of reporting
- Detail in reporting calculated by LP, fund, and deal; funded and unfunded commitments, gross vs. net returns, realized vs. unrealized calculations
- Reconciling historic and current fund GAAP vs. capital accounting
- Waterfall calculation detail to support marketing material data on historic fund and deal performance
- LP specific concentration metrics for historic and projected performance by sector, deal, and/or geography
Funds are adjusting to LPs heightened focus on back-office functionality. In Ernst & Young’s “2017 Global Private Equity Survey” that surveyed 103 PE CFO’s, 62% responded “Improved investor reporting” to the question of “What have you done to be competitive?” This response was second only to “Hiring talent.”2 Furthermore, a recent study revealed that requests from LPs for greater transparency and increasingly complex reporting requirements has forced GPs to adopt data management technology and digital reporting services. According to this study, 72% of LPs require their GPs to provide enhanced levels of transparency around fee structures while 54% are requesting greater clarity on the performance of underlying portfolio companies3.
We hear from our clients that LPs are demanding more transparency than ever before from fund managers. The biggest challenge GPs face is providing client-specific accounting and data at the detailed level requested by investors. As a result, the focus on the back office has become an important component of due diligence when determining which funds to invest in. CFOs are now more involved in the fundraising process than ever before and also are investing in the financial administration capabilities to meet LPs reporting requirements.
1Preqin: Q1 2018 Investor Fundraising Update
2Ernst & Young: “2017 Global Private Equity Survey”
3Intertrust: Private Equity Markets 2017