At pfm, we're staunch supporters of what the AltExchange Alliance is trying to achieve. For the uninitiated, a group of LPs, GPs and other industry players came together late last year to create an industry-wide data standard. The idea is to make it easier for everyone to exchange fund information by ensuring everyone speaks the same (reporting) language. It’s a hugely important goal that, if achieved, would make it easier for GPs to generate customized reports for information-hungry investors. There are also tangible benefits for LPs, who as recipients of these reports, currently have to normalize and re-key data sent into their own proprietary systems – a time consuming and error-prone process.
The latest news is that AltExchange added representatives from the Institutional Limited Partners Association (ILPA) and SunGard to its board. But other than that, the initiative arguably hasn’t been capturing as much buzz as it should, given the significance of its objectives. In the past, we’ve suggested that part of the problem is AltExchange’s commercial relationship with eFront, which is preventing rival industry software vendors – who build and operate these reporting systems – from joining the cause. Under a five-year contract, eFront certifies documents running through the AltExchange validation platform. It was hoped that having SunGard within its ranks – and giving it a seat on the governing board – would alleviate those concerns; but major software vendors like iLevel and Burgiss Group are still notably absent from AltExchange’s membership list.
For this initiative to really catch fire, then, it seems the contract with eFront will have to go. Market chatter at the moment suggests that Francisco Partners will divest its investment in eFront in the coming months, which could help facilitate change. Perhaps the independent team at eFront responsible for running the validation platform is spun out as a wholly separate entity. (A spokesperson for Francisco could not be immediately reached for comment.)
It’s even worth considering if the validation platform is needed at all. Much like the SEC’s EDGAR filing system, a cottage industry could grow around an open standard that is free to use. Businesses can charge users to deliver the data correctly to LPs. If a data file is sent back for not meeting the standard, it goes back to the original sender to make corrections.
Membership dues at AltExchange are also pretty low ($1,000 per annum per institution), meaning the alliance needs a smarter way to finance its success. Some argue that ILPA should buy (and fund) the initiative –but LPs see data standards as more of a GP problem. And there doesn’t appear to be much appetite amongst GPs to pay higher dues for a standard that is yet to be proven. So where else is the money going to come from, at least in the near-term?
Custodians are one answer. With their large balance sheets, it would be easy for multi-trillion dollar firms like State Street or BNY Mellon to pay AltExchange an annual fee to keep the standard up to date (with or without the validation platform). The benefit for them is less work processing capital call notices, performance reports and other laborious exercises that require significant data entry. Automating those tasks would achieve cost savings on a process that currently runs at very tight margins.
Another contender is the Securities and Exchange Commission, which could adopt the standard as its own in the name of investor protection. It can be difficult for smaller LPs to analyze portfolio risk when multiple GPs send reports in various formats and style. With a regulator behind it, an industry standard could be achieved through force.
The challenge will be to get custodians or the SEC to take notice of the issue. As an asset class, private equity is still a tiny industry when stacked against other industries that have automated data standards like banks, insurance and bonds. But it’s definitely a cause – and an outcome – worth fighting for.