“What are they doing with all this data?”
It’s a common question from CFOs on the hook for gathering and re-cutting performance data, or filling out endless due diligence questionnaires for investors.
Finance professionals often voice doubts that their investors – which increasingly demand more granular detailed data in different formats – are actually doing something with it.
At the CFOs and COOs Forum in New York this week, LPs shed light on the issue in a discussion held under Chatham House rules.
Said a large public pension plan: “We use two consultants, but we also ask for cashflows from GPs and put them into a platform called TopQ. We will do the work on a challenging re-up; we will re-underwrite it. We ask for the granular information and actually use it.”
Said an investment consultant: “We have 30 people in our data science team. So we do use that data. It drives a lot of our decision making.”
Said a fund of funds: “We are using [the data]… not just the cashflows, but the DDQs as well. CFOs, your work is not for naught.”
Granular cashflow data is being requested by LPs so they can properly compare one manager with another. “We ask for gross and net cashflows to calculate all returns and fairly compare one GP to the next,” said the fund of funds manager, noting that efforts to standardise performance reporting were still far from being widespread. “We’ll continue to calculate performance ourselves,” she said, noting that capital recycling, at both the portfolio and fund level, “really impacts your multiples.”
“We’ll compare our number to what is in your PPM and dig into that,” she said.
LP, meet CFO
While the investors differed on whether they had frequent interaction with the CFO during fundraising, they agreed that the quality of the data – and the responsiveness of the finance team – is a key indicator about the GP’s abilities.
“It’s you guys doing the work,” said the fund of funds manager. “The direct relationship with you is key. If the data is clean, the team is responsive, it really goes a long way toward the impression we have of you as a firm.”
The public pension executive acknowledged that a lot of the things that they as an investor are looking to achieve – secure full allocation or secure co-investment rights – will often be decided in the CFOs or COOs office. “It’s great for us to have that direct relationship, because the decisions that impact us are probably made in your offices.”
Also on the LPs’ agenda:
- The greater usage of credit facilities has made performance assessment a more confusing process. That said, the LPs in the room were agnostic about their usage. “We hire you to make money for our clients, so we have no set view on whether you should or shouldn’t use a credit facility. But we are against drawing down a facility in order to make an early, ‘fake’ distribution. That is not a good use of a credit line.”
- Going from being a single-strategy firm to a multi-strategy firm is not a bad thing – and may be a preferable way to build the firm rather than just raising bigger and bigger funds. But the new strategy needs to have a new team behind it; don’t just spread the current partners across the new strategy.
- Stapled fundraises – where a commitment to one fund is dependent on a commitment to a different vehicle – are viewed with suspicion by investors. One described themselves as allergic to them. “I’m not a fan,” said another.