Private equity has a data problem. And it’s set to get worse in the coming years, if rival software providers end up taking separate paths in offering a solution.
For the uninitiated: a group of LPs, GPs and service providers came together last May to create standardized reporting formats, which if used by all parties, would allow data sharing to become automated in the industry. Calling itself the AltExchange Alliance, the group now has over 40 members working together – including some heavy hitters like Kohlberg Kravis Roberts on the GP side and Texas Teachers on the LP end.
Many in the industry are hopeful the alliance’s work will reduce administrative burdens. As PE Manager has been reporting, data sharing between GPs and LPs tends to be a ponderous process. For information to reach investors, fund managers typically have to collect it at the portfolio level, produce quarterly reports, and publish them on a specific website; LPs then have to log in to the portal, transcribe the data into the format they use, and, more often than not, manually re-key the numbers into their own systems.
Frustrated by the process, many LPs send their GPs bespoke reporting templates that require countless man-hours to complete. These reports tend to ask for the same information, but in different formats – making it difficult for chief financial officers to automate the task. Or, when a LP has a specific information request about a fund’s risk exposure to German manufacturing, say, ad hoc emails or reports need to be created on the spot.
It’s an ironic outcome for an industry that prides itself on cutting waste.
Industry software vendors are keenly aware of the problem. But so far, they’ve only been able to offer limited solutions – partly because of the diverse range of fund structures and investment strategies used by their private fund manager clients, who can’t seem to agree on a single format for transporting portfolio data. If a single standard was agreed, software vendors could use that universal reporting language to help GPs build and manage platforms that feature interactive information pipelines running directly from portfolio companies to inquisitive investors, saving all parties involved valuable time and expense.
In theory, that’s where the AltExchange Alliance comes in. Already the group has defined some basic terms like capital accounts, schedule of investments, and cash flow activity that can be used to automate fund-level data reporting. This year, the group will begin tackling tougher terms related to portfolio company data, as part of its “phase two” planning.
But here’s the rub: not everyone believes the alliance will be successful. And if it fails, there is concern that competing software vendors will continue pushing their own proprietary standards, in effect prolonging the industry’s current data reporting problem.
COMMERCIAL CONCERNS
The single biggest obstacle to AltExchange signing up more members – a crucial step if its standard is ever to be adopted industry-wide – is its commercial relationship with eFront, one of the big four software vendors servicing private equity professionals.
AltExchange says that for its data format to truly be considered standardized, there needs to be some way to enforce its use, and more importantly, validate the data files attempting to adhere to its format. That’s what eFront does – certify documents running through the AltExchange validation platform, under a five year contract.
AltExchange’s bylaws specifically state that applicants must “enter into a binding agreement” with the AltExchange Validation platform (which is operated by eFront) so that this certification service can be performed. And it’s that requirement which is putting off other software vendors from wholeheartedly embracing AltExchange’s data standard.
“Why would we come on board to join this? Why would we feed business to a competitor?” one industry software vendor representative told PEM (speaking on condition of anonymity).
What’s more, eFront is AltExchange’s main financial backer, which has enhanced the perception amongst rival software providers – the other big three being The Burgiss Group, Blackstone spinout iLEVEL and SunGard’s private equity software platform Investran – that the Alliance is actually a disguised eFront initiative.
AltExchange founding member Stuart Keeler – who’s also eFront’s managing director of data initiatives –takes issue with that assessment. He says eFront has a six-person team responsible for running the AltExchange validation platform that is wholly separate from the rest of the software firm. And the team “is not allowed to store data for eFront’s use”.
Asked if other software vendors could manage the validation platform when eFront’s contract expires in 2018, Keeler said there was no reason why not.
“What the alliance can even do is eventually set up its own operating company that runs it, or put it out to tender to other tech companies. Depending on the terms, even an accounting firm could do it.”
On the issue of funding, Keeler says the alliance sought backing from a number of industry players – only to find that investment from a software vendor made the most commercial sense.
“LPs couldn’t invest in the non-profit alliance, because their remit is to generate returns for their fiduciaries. The board also explored the idea of some GPs funding the alliance, but it was the same story: no promise of returns.”
eFront, on the other hand, didn’t have these investment concerns, says Keeler. Instead, the group was awarded the data certification business, as well as a 20 percent cut of the alliance’s margins as part of the five-year deal.
Nonetheless, others believe the links between eFront and AltExchange as too close. “It’s eFront who’s fronting them the money, so at the end of the day, it’s eFront running the roadmap,” says the software representative.
Commenting on that perception, Keeler notes that 70 to 80 percent of the alliance’s GP members in fact use Investran, “which is evidence that all software service providers stand to benefit from the group’s data standard.” He stresses that the standard itself has been explicitly designed “to be vendor neutral –to plug into any system being used in the industry, whether that be Microsoft Excel or one of eFront’s competitor systems.”
Keeler adds that the AltExchange board has representation from major LPs and GPs – meaning no software vendor could try to set the alliance’s agenda.
“What has to be remembered is that the AltExchange Standard is the result of a lot of hard work done by LPs and GPs to create a data format that supports their business needs, and not any particular vendor,” says Keeler. “Any question mark about commercials can only relate to the operation of the validation platform and funding options, which were fully investigated and explained to the membership prior to formation of the alliance.”
ROOM FOR COMPROMISE?
The Institutional Limited Partners Association (ILPA), which has a strong interest in reducing investors’ reporting woes, may be the best bet to bring software vendors together and push through a single data standard.
Already ILPA has developed some open-sourced Excel-based guidelines, which in conjunction with reporting guidelines written by the International Private Equity Valuations Board, laid the groundwork for AltExchange’s own data standard.
What ILPA would like to do is host a “technology roundtable” sometime this year that brings “every software provider together in the same room so that we can ask what needs to happen for this single standard to move forward,” says former ILPA managing director Michael Elio (who PEM recently revealed is moving to become a partner at secondaries firm StepStone Group).
According to Elio, one solution is for ILPA to take up the AltExchange Alliance’s standard and host it on the group’s website for open adoption. Industry software vendors speaking on the condition of anonymity say a neutral industry trade body like ILPA or IPEV (or perhaps both working together) providing the financial support for AltExchange would make them feel more comfortable that the alliance is not an eFront initiative.
If this doesn’t happen, software vendors seem set to continue promoting their own proprietary data standards. In fact, other vendors have contacted ILPA to offer their standards for free, presumably in the hopes that their data terminology and domains stand a better chance of catching on amongst LPs, and subsequently the industry at large.
Some software vendors even feel they’re better-placed to create an industry-wide standard. iLEVEL chief marketing officer Mason Power says the AltExchange Alliance is working slightly backwards by defining the industry standard first, and then “hoping everyone has the data and the software to convert their own data format to that standard” as a second step.
Instead, he says, it makes more sense to analyze the data being tracked by GPs and LPs first, and then craft a standard from there. GPs use iLEVEL to monitor portfolio companies; iLEVEL recently extended its data collection and reporting software to institutional investors who collect data on portfolio companies, funds and cash transactions from GPs.
“So instead of an exercise where GP and LP representatives sit around a table designing the theoretical standards, and then try to install software to collect data, and then generate the standardized format, iLEVEL already is that software,” said Power.
iLEVEL is rumored to be announcing that it will donate its own standardized data definitions to ILPA and IPEV sometime soon. It’s understood that iLEVEL will not charge for use of these standards, nor mandate use of specific validation software. Instead, it expects an industry body to govern the standards – without any one vendor tied to the alliance commercially.
The AltExchange Alliance, meanwhile, will continue inviting more software vendors to come on board as a way of achieving its goal of creating an industry-wide standard. iLEVEL declined to comment on its potential participation in the alliance, while The Burgiss Group and Investran did not return requests for comment.
The time is certainly ripe for standardized and automated reporting in the private funds industry. GPs are producing far more ad hoc reports than in the past, while LPs are receiving scores of reports in different formats. Clearly there’s a big incentive to work this problem out – and increased regulatory reporting requirements have already demonstrated to the industry how some information sharing can be standardized.
However, myriad challenges remain; sources say the real test in the coming months (or years) will be how a single standard automates portfolio company information sharing, where there is far more disparity in how data is tracked and stored. It’s an issue that PEM, like chief financial officers and LPs, will be watching with interest.
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