Let’s get one thing straight: the industry is entering – in fact has entered – an era of transparency. From all angles, private fund advisers are being hit with information demands (whether it be regulatory filings, tax reporting or more financial disclosures required by auditors).
Of course investors are part of the trend too, although here the information demand is actually more of a request. For investor relations reasons, GPs have happily obliged these wants, but failing to do so doesn’t result in fines or, worse still, criminal prosecution. Instead, the firm risks losing a LP commitment, either big or small. There’s more of a choice here as to how much data is shared, in other words.
In fact, a May Intralinks survey revealed that almost three out of four LPs have turned down at least one fund manager because of concerns over disclosures and reporting. Curious to know what may prevent GPs from simply releasing more data (time and costs?), we asked a range of industry sources about what’s going on here. Their response was near unanimous: the issue is portfolio company data and privacy concerns.
Show me the money
“Just a few weeks ago when we were discussing the legals with a GP, they did not give us enough assurances that they would provide us with all the portfolio company level details we needed, so we didn’t make the commitment,” says Philippe Bucher, chief operating officer and chief financial officer of fund of funds Adveq.
In turn, portfolio company data is what multiple private equity CFOs agree is one of the biggest disagreements they’re currently experiencing with investors. LPs say the information is needed to gain a better sense of portfolio company performance, rather than having to rely on a GP’s valuations.
One New York-based CFO explains the situation by noting LPs are reacting to their own auditors when it comes to valuations. Concerned an auditor may question their trusting attitude to private fund managers, they want to have on hand enough portfolio company data to justify the marks. As reported previously in pfm, the Governmental Accounting Standards Board (GASB) released an exposure draft that better codifies how state and local governments should define and measure fair value. Many in the industry expect the GASB rules to push public pension plans and other LPs following GASB standards to require more rigorous, timely reporting by GPs (see our September issue).
CFOs aren’t exactly embracing this (possible) trend. “We know how to value these things and do our job,” the New York CFO said. “It’s impossible to make a valuation judgment just on a revenue multiple or EBITDA multiple without knowing everything else about the business.”
Other CFOs speaking to pfm even questioned whether LPs were using this information at all. A second US-based CFO calls the LP requests a “check the box” exercise. “What are they really going to do with operational data? They are a limited partner; they can’t say ‘I think we should sell this investment, or I think we should fire the head of sales because the top line is not growing fast enough.’”
Just say no
What many CFOs are calling “time wasting” data requests are leading some GPs to simply refuse investors’ portfolio level data requests.
“For LPs to take all the data and figure out whether we are making good investments, on a daily basis, is not something we can spend the time going over with them,” says a third CFO.
The firm’s investor relations staff may take issue with that strategy, but the CFO guesses most LPs are only asking for the sake of asking. “It doesn’t hurt them to have the data but they don’t know what to do with it once they have got it.”
LPs, however, are challenging that view. “It [portfolio level data] is critical for us to do our analysis on our fund managers and as a monitoring job,” says Graeme Gunn, partner at fund of funds SL Capital. “We also want to be able to disclose to our investors the type of assets they are invested in.”
Nonetheless, Gunn seems at least in partial agreement with CFOs’ take on the matter. “We get some [information requests] and think what value is this going to add? But it’s usually just because somebody has been told they need to have it and so we always work with them to get what they require.”
Adveq’s Bucher agrees that investors are asking for information more frequently too. He says LPs’ governing bodies, for instance, may want to know their daily Ukraine exposure or some other metric.
Fear the FOIA
Portfolio level data isn’t the only area where GPs are pushing back against LP information requests. Fees and expenses is creating tension in the LP-GP relationship too, sources say. A May speech made by the Securities and Exchange Commission’s (SEC) chief inspector, Drew Bowden, is cited as the primary driver of the trend. Earlier this year at the PEI Private Fund Compliance Forum in New York, Bowden unveiled a laundry list of questionable fund expenses common in the industry. Naturally LPs began asking questions.
“We have had a number of requests from large state pension funds asking us to respond to what has been said by the SEC and they essentially say ‘tell us where you are taking advantage of us’,” says the second CFO. Many of his colleagues said that in certain instances they’re refusing those requests, not from having anything to hide, but from fear that a pension plan may receive a Freedom of Information Act (FOIA) request.
“We had a bit of a tussle with the first state we sent information to,” the second CFO continues. “We wanted them to redact some of the things we said because we only thought we were communicating with a limited partner and we included some information we did not want all over the newspapers.”
To get around the problem, the CFO says he began arranging calls with LPs to discuss fees and expenses as opposed to putting everything down in writing. However not everything went according to plan. Within days of the call, the pension fund received a FOIA request and were prepared to turn over their notes from the phone conversation.
“We had our lawyers go back to them and say: ‘That is hearsay – we are not going to let you hand out the notes, which could have said anything, or misinterpreted what we said.’ It’s kind of a witch hunt feeding frenzy about these matters,” the CFO said.
So despite the constant message that GPs are becoming more transparent, and the perception that GPs are obliging every information request, market sources say there are still certain instances where GPs keep things private. How long GPs can hold that line remains to be seen. A CFO of a first time fund admitted that he has to give his investors portfolio company data, explaining that many demanded it as a condition of committing to the fund. How well GPs’ next fundraising goes will most likely provide the answer as to how far into the weeds an LP is allowed.