The private equity industry is embracing investor and regulator demands for greater transparency following the financial crisis. But can the push to ever-more disclosure be a bad thing? It’s time for an honest debate about what information investors need and what managers should provide.
The drive towards greater transparency started with the financial crisis when investors and regulators found that portfolios of what they believed were low-risk investments contained toxic elements. The result was a swathe of tougher rules from regulators designed to protect investors, as well as increased demand from investors for more granular analysis of assets so that they could understand the risks and set aside appropriate levels of regulatory capital.
Managers and investors understand greater transparency to be a good thing. It has made private equity more open and accessible to all manner of investors, ultimately driving assets under management. But it also puts huge burdens on the private equity industry and can ultimately distract from the job in hand – investing in and managing companies around Europe to deliver superior returns.
Large financial institutions like insurers, managing billions of euros of assets, have the resources to meet the risk management and transparency requirements of regulation like Solvency II. They, in turn, are placing more demands on private equity to meet higher standards – and many managers are having a tough time responding to this pressure.
Firms need to invest in and maintain new systems to track and report on their investments. Their people must spend more time on gathering investment data and reporting back to investors, or they need to hire new people to take on this role. Furthermore, the advent of dynamic reporting – disclosure tailored to individual investor’s needs – to replace standardised reports, adds an additional layer of complexity. What if all that time spent on disclosure hindered investment performance or industry development, would it be such a good thing then?
Large private equity managers – like the large institutions they serve – are starting to tackle the demands with new infrastructure and new people. However, smaller investment managers in the mid-market and lower mid-market often lack the scale and resources to build these operations. Moreover, new managers may be put off forming because the barriers to entry are simply too high.
Associations like Invest Europe and the Institutional Limited Partners Association (ILPA) have helped by defining best practice reporting standards. These have pushed large parts of the industry to be more open with investors.
Yet limited partners should be cautious about pushing for transparency for transparency’s sake, and need to recognise the different capacities of investment managers to meet complex reporting demands. Meanwhile, for general partners, data is the key. Gathering and managing robust data on investments will help them meet investors’ demands and adapt to new requirements.
It’s time for an open debate about what disclosure is needed, how it may impact private equity focus, and how transparency is best served. Please join me at the Investors’ Forum in Geneva where I will be discussing this topic and others relating to the changing LP/GP relationship.
Paul Lawrence is Global Head of Fund Services at Intertrust.