For an industry that prides itself on efficiency, it's ironic how much time and effort is still being wasted on fund reporting. The hodgepodge of different data formats used by GPs to send investors quarterly statements requires frustrated LPs to normalize and rekey the data (often sent through pdfs) into their own systems, or throw their hands in the air before demanding the GP provide them with customized reporting. Smaller LPs especially, who have less clout to demand ad-hoc reporting, are struggling to capture fund data for risk monitoring and performance analysis purposes.
It's surprising then that the AltExchange Alliance hasn't proven a wild success. This consortium of LPs, GPs and service providers pushing for a common standard to share data, has brought the industry the closest it's ever been to solving its reporting problem. Earlier this month, the consortium published its latest work: a common set of definitions for portfolio company terms – a critical achievement given LPs' newfound thirst for portfolio information. To be fair, a voluntary standard was never going to be accepted overnight, but CFOs aren't demonstrating a level of enthusiasm for the AltExchange initiative in proportion to its importance.
Readers will remember a few reasons we've presented as to why. AltExchange isn't the first group to offer the industry a common data standard; in fact a number of fund administrators and service providers could be said to be jockeying for their standard to be the standard. Critics contend that AltExchange is just another name in the mix, on account of its historical and commercial ties to eFront. GPs are also resistant to accept any new standard that isn't already compatible with their current reporting procedures and systems. And it's easy for the status quo to remain until investors collectively demand that a single data format be used. (Because it is hard to think reporting will be what makes or breaks a LP's fund commitment anytime soon, certainly so for well-performing managers.)
So what options does that leave? For starters, allow us to repeat the suggestion that the ties to eFront are severed. As is, the AltExchange standard requires users to run files through a validation platform (managed by eFront) that gives the impression that the alliance is biased towards any one vendor. Take that relationship away and industry-wide groups like ILPA and IPEV are probably more willing to advocate its adoption (they prefer not playing favorites). The answer to what to do with non-validated files is fairly simple: either the files are sent back to the user with specific error codes, or allow a cottage industry of service providers to offer their help. We've already seen this happen with the SEC's EDGAR system, with competing software vendors offering to file Form 10-Ks or 10-Qs on registered companies' behalf.
The other option is to convince regulators like the US Securities and Exchange Commission to push a standard through force. Granted, it never seemed likely the time-strapped commission would put something like this on their to-do list, but after granting fund managers the right to publicly advertise their funds via relaxed general solicitation rules, they’re much more keen to see fund managers report performance information under one, fixed standard.
We can’t stress enough the importance of AltExchange’s mission. It’s not a matter of if the industry will ever use a common data standard, but a question of when. Unfortunately, that may be a while unless the initiative can convince more people to embrace its standard.