Reporting: In search of the holy grail

It’s hard not to sympathise with limited partners. Dozens – in some cases, hundreds – of funds may comprise any one LP’s portfolio, and each comes with its own reporting style, format and level of detail. When you start to think about the various underlying assets which each fund must report on, the task of monitoring a private equity portfolio seems daunting, particularly given LPs typically have fewer than five professionals dedicated to doing so. 

Then there’s the fund managers themselves. “The issue is when you look at some of the requests, you can’t be blamed for being a little bit suspicious as to whether you are actually being asked to fill in the blanks and do the calculations for your LPs to satisfy their own internal reporting requirement,” griped Leonard Wei, chief operating officer at ARCH Capital Management, at our CFOs & COOs Forum Asia held in Hong Kong shortly before the close of 2011. 

Wei went on to share an anecdote where he combed through a 75-item checklist from an investor. He found that answers to 42 out of the 75 questions could easily be determined by looking at four slides from the firm’s quarterly report sent to LPs. 

Despite the headaches around LP requests, any GP worth their salt knows effective communication skills are a big plus with investors. Many LPs even say they would happily sacrifice a few extra basis points of return for a GP who hits the right marks around their timeliness and quality in reporting for example. In response fund managers are updating their reporting methods and communication approaches to meet LPs varied requests. 

The end result of these trends is an industry in desperate need of some type of standardisation in the reporting process. LPs say some level of uniformity would streamline their digestion of custom-made reports. GPs on the other hand hope standardisation would translate to fewer ad-hoc information requests, freeing their time (and resources) for other tasks. 

Follow these guidelines

Identifying the problem is unfortunately only one step in reaching a solution. In various interviews with PE Manager industry sources stressed the complexity, and perhaps impossibility, in crafting a universal reporting format. 

For starters the industry encompasses a strong diversity of fund structures and investment strategies, points out Ian Harris, chief operating officer of SL Capital Partners. Venture capital funds for instance make smaller investments and hold portfolio companies with less reliable growth projections. Deciding what company information should take priority in a venture capital quarterly report should therefore deviate from what’s highlighted in a standard buyout fund template – which would presumably have more to say on portfolio companies’ current and projected revenues, operations, margins, EBITDA and other operating metrics.

Perhaps more importantly is the disagreement in what any standard fund report should look like. Reporting guidelines crafted by the Institutional Limited Partners Association are one attempt to introduce some standardisation in capital call notices, quarterly reports, and distribution notices. But some GPs are criticising ILPA’s templates as too time demanding and argue they would burden investors with an information overload.

A different set of reporting guidelines will be released in the coming months by the International Private Equity and Venture Capital Valuation board (IPEV) with the aforementioned concerns in mind, revealed William Hupp, chief financial officer of Adams Street Partners, and IPEV board member, in a recent interview. “In our approach we have tried to determine what the essential disclosures are for GPs to meet the principle of transparency and provide LPs the core information they need as investors,” said Hupp. “This will make determining compliance [with the guidelines] easier.”

ILPA’s already released guidelines show the challenge IPEV will face in appeasing stakeholders. Look specifically to ILPA’s capital call notices to understand some of the current criticisms, says one US-based private equity chief financial officer speaking on the condition of anonymity. The template offered for capital calls does little to distinguish itself from a distribution notice, two events independent of one another, he continues. Cross-sharing information between the two (as a matter of disclosure) can add unnecessary data in a notice, potentially confusing LPs. ILPA’s sample capital call notice letter requests historical information on both events, adding noise to what should be a relatively straight-forward release, he argues. 

“Why not save the historical data and more detailed information strictly for quarterly reports?” he asks. “Or, for those LPs who need certain detailed information before then, supplement a report with the requested information on a more ad-hoc basis”. 

The way information is presented is another potential area frustrating universal adoption of ILPA standards. Using the same capital call sample letter, a number of numerical factoids are scattered across the notice in paragraph form (see below). “It seems like LPs could get lost in the language and would likely benefit from a table or graph detailing the core data around the capital call,” says the chief financial officer. 

Perhaps ILPA’s greatest challenge has been striking the right balance between uniformity in reporting whilst incorporating a degree of flexibility in their guidelines. Flexibility allows GPs to tailor their reports based on investor needs and specific fund characteristics. However the risk of too much flexibility, as openly voiced by some private equity chief financial officers, is that ILPA’s reporting standards can in turn become too subjective, making compliance with any standard reporting model unclear. 

Joe Dear

In an interview Joe Dear, chief investment officer of The California Public Employees’ Retirement System, praised ILPA’s efforts, adding that the “guidelines went through a revision and I think the message was heard that they are not intended to be one-size-fits-all and to be compliant with the guidelines didn’t mean that they have to be absolute letter of the law in compliance with every single thing”. 

Dear went on to say:  “This institutionalisation of the asset class through templates, through other standardisations, should make it easier for everybody in terms of information gathering, for responding to requests, processing capital calls and distributions and the like.

“That’s not very exciting, but it’s actually, from a day to day investment management standpoint, these are important advances and I don’t think they would happen without a body like ILPA to be a convener.”

Room for improvement

Standardisation or not, many GPs could reduce both their and LPs reporting woes by updating (or tweaking) their current reporting methods. As mentioned above, some GPs complain LPs do not thoroughly read quarterly and annual reports (instead preferring to get a GP or investor relations member on the horn to discuss figures). 

It could be argued that this is as much the fault of the GP as the LP, says Courtney McCarthy, chief investor relations officer at Summit Partners. Financial reports, which can range anywhere from 15 to 50 pages depending on the size of the portfolio, “require a level of detail that can make it hard to digest for an LP who is pressed for time”.

Complicating the matter is the difference in style from one report to another. Some GPs lead their reports with a business overview, others perhaps a market commentary, and others still maybe with a breakdown of recent realisations or investments, says McCarthy. 

“Many GPs do not consider their options when crafting the layout of the report. They miss the chance to make it a more useful and enjoyable reading experience for LPs, and in so doing they miss an opportunity to reinforce key elements of their strategy by helping the LP draw compelling conclusions”. 

McCarthy says a better approach would be for GPs to utilise summary sections and “stick to it…thus, after a few cycles, everyone understands what goes where.

“The writers will thank you, too, as they do not have to consider reinventing the wheel each reporting period”. In a world where reporting standardisation seem always out of reach, it’s easy to see how doing so may be a smart way to build good relations with LPs.