Information overload

“The bottom-line risk with information overload is that investors will have so much information available to them that they will sometimes be unable to distinguish what is important from what is not.”

Sounds like just the type of point a firm’s chief financial officer might make in response to the growing number of information and reporting requests from LPs. Speakers at PEI’s CFOs & COOs Forum held in Hong Kong last week noted the rising number of requests, and the granular details they seek, seemed at times superfluous and suggested they were becoming so time consuming so as to interfere with a fund manager's ability to invest capital and manage its portfolio.

Surprisingly though, the aforementioned words were spoken by US Securities and Exchange commissioner Troy Paredes, who during a recent speech to university law students warned of the dangers in drowning markets with too much disclosure information. He said: “Too frequently, investors do not bother carefully studying the information that is available and get overwhelmed or distracted, misplacing their focus on less important matters.”

Some industry pundits, of course, would be quick to say the SEC should have considered the same point when crafting its own disclosure requirements for private equity firms, many of which are not pleased at the level of detail and overall red-tape that SEC registration and reporting requires of GPs.

Leaving that aside, though, Paredes' words cut to the heart of the debate currently swirling around efforts to standardise LP reporting. The Institutional Limited Partners Association (ILPA) has been releasing a set of reporting templates, which if adopted universally would mean LPs would get information they need in a format they can handle, while GPs could report to all their investors in the same way, instead of having to produce customised reports. In theory, it sounds great. But in practice, some private equity CFOs have criticised the ILPA guidelines as too time demanding and argue they would burden investors with an information overload. 

Another set of reporting guidelines is expected to be released by the International Private Equity and Venture Capital Valuation Board (IPEV), a group formed in 2005 by European trade associations to try and harmonise valuation and accounting frameworks across the industry. It's too soon to know whether IPEV's guidelines will be more popular than ILPA's have been, but it's a positive step to see another group attempt to make standardised reporting an achievable goal. Clearly, the current situation is not working and is creating tension between fund managers and investors. A balance must be found that enables GPs to provide information to their investors without overloading them unnecessarily and without making it a task that interferes with their primary goal of investing capital, building better companies and producing excellent returns.