A flexible framework for bespoke investor reportingBy Jonathan M. Martin on 9 November 2018
Picture the typical European private equity investor. Perhaps you have a public pension fund in mind, an insurance company or a sovereign wealth fund. Now think of the typical private equity fund manager. Maybe you are considering a global large buyout firm, a local mid-market manager or even a late-stage venture capital firm. The fact is, they are all typical investors and managers.
It goes without saying that they have very different needs and levels of resources. Likewise, their investments come in a vast array of shapes and sizes. When it comes to investor reporting this can bring challenges. For instance, if an institutional investor wants two pages of detailed financial information on every portfolio company each quarter, a large buyout firm investing in well-established corporations may be able to deliver that, but for a venture capital fund investing in numerous young start-ups it could be unrealistic. As investors are requiring increased transparency, how can they get the information they need in a way that is feasible for all their different fund managers?
Moreover, there are the different needs and preferences of the investors themselves to consider. While the Institutional Limited Partners Association’s template provides an important foundation for private equity reporting, in practice investors often build personalised reporting structures to suit their own way of working.
The private equity landscape in Europe today is as fast moving as it is broad. Fund managers and investors need to keep up with evolving industry practice, policies and regulation. So too does investor reporting. It needs to be adaptable, practical and future-facing so it can apply to the wide variety of players and scenarios. And it needs buy-in from both sides of the negotiating table, so both general partners (GPs) and limited partners (LPs) can refer to it and understand what is feasible and necessary.
This is where Invest Europe’s Investor Reporting Guidelines come in. Since 2000, the European private equity association has brought together investors, fund managers and advisers to discuss and agree on guidance that works for all segments of the industry and addresses changing practices. An integral part of Invest Europe’s Professional Standards Handbook, it proposes a flexible framework with examples that illustrate how it can be applied.
Updated for 2018, the latest guidelines now include tailored sections to cater for the specific needs of segments from venture capital to fund of funds, secondary funds and infrastructure for appropriate and relevant reporting to investors.
More broadly, one recent market development is the increased use by GPs of bridge financing, or subscription lines of credit. These facilities give general partners the ability and agility to quickly close new investments or follow-on financing, while leaving limited partners with predictable capital calls so they can more easily manage cash flows. However, it raises the question of internal rates of return potentially being influenced by delaying investor capital calls. How, then, can LPs compare funds fairly? Invest Europe’s Investor Reporting Guidelines now outline how and when to disclose the use of fund bridge and leverage facilities, so investors can assess funds on a level playing field.
What Invest Europe has produced is the world’s only toolkit for reporting created by and for GPs and LPs, designed to encompass diversity, personalisation and evolution. As private equity broadens and develops with shifting priorities and market practices, open communication and regular cooperation is the way forward for promoting transparency and understanding across the industry.
First published in Real Deals.