Commercial Director, Americas
As the trend toward better fintech expands, what can investors expect to gain through improved manager transparency in private funds?
As guardians of the assets of millions of individuals, institutional investors are increasingly demanding a higher level of transparency on their investments in private markets to protect against risks that stem from a lack of information.
Emerging managers preparing for fund growth must set standards for providing regular data documentation about holdings in order to meet the expectations of larger investors. Without a one-size-fits all approach, however, many managers are scratching their heads about what they are expected to provide in order to be “institutional ready” – in other words, being transparent enough to satisfy the demands of institutional investors.
Ensuring data integrity
Generally, both emerging and large funds are ultimately expected to be able to produce the same type of verifiable data and documentation, though the overall ask may be larger for a smaller, less established fund with a less confirmable track record. Before committing capital, investors expect managers to produce clear and comprehensive information about policies, procedures, fees, legal documentation, portfolio holdings, and much more.
Specifically, fund managers should be prepared to ensure accuracy and provide transparency in three distinct data gathering and communication areas:
- Database management. As the most foundational source of investment information, it is imperative that managers ensure their database input is current and correct. Beyond the obvious mitigation of investing risk based on inaccurate or outdated information, this boosts manager credibility and eliminates the need for follow-ups and corrections.
- Regular periodic investor letters and reports. It’s critically important for this regular communication with investors to be high quality, thorough, detailed, and accurate. Managers should also ensure they’re creating robust due diligence questionnaires (DDQs), since this is how investors assess available investment products. At a minimum, managers should update these thoroughly every quarter, ensuring that all products, views, and key changes are reflected.
- Ad-hoc reports and queries. Private fund managers must be diligent about making investors aware of all major key changes and events as they happen; they must be proactive and agile in their communications, so investors hear important news from the source first, not the media. This gives managers the opportunity to better control the conversation and explain if or how the news affects portfolio investors. Additionally, it ensures that investors get fact-based rather than sensationalised information. Prompt and proper response to investor queries also builds trust and credibility and strengthens the investor-manager relationship.
In the private funds space, the burden has historically been on managers to provide the right data at the right time and in the right format. But, is the industry making advances as far as data standardisation?
Currently, best practices and standards do exist across the industry as far as what investors expect and should receive and on what schedule, but many managers still provide highly customised reports and responses. Smaller managers generally customise more because they lack the resources to invest in technology that enables a more standardised investor relations process. Therefore, smaller managers typically take a more bespoke approach to one-off information requests. Bigger managers ($10bn+), however, generally use technology to provide more uniform investor communication and relations. With the level of requests that larger managers receive, manual responses are typically not an option.
The role of data in operational due diligence
Private fund managers who prioritise keeping their data clean and standardised generally see a simpler and more focused investor operational due diligence (ODD) process. By doing so, investors can utilise standard and prepared materials to assess risk, which relieves the burden on the fund management team. A key piece of comprehensive reporting for a more streamlined ODD process is a detailed and updated DDQ in the Alternative Investment Management Association (AIMA) format.
Generally, institutional investors hold start-up managers to a high standard for reporting and data disclosure since there are more unknowns. As investors complete detailed due diligence on managers out of concerns related to fraud, operations, and investments, the bar for evidence of credibility is significantly raised.
Data transparency for ESG investing
Environmental, social, and corporate governance (ESG) is increasingly top of mind for investors, managers, and corporations alike. Similarly, investors are expecting and using ESG reporting data to get a better understanding of companies in which they’re investing. This presents a new set of transparency standards for managers.
ESG reporting currently lacks universal standardisation but it’s most certainly forthcoming. Presently, we’re seeing three levels of data requests as far as ESG, which depend somewhat on the manager’s specific investment strategy:
- General manager organisational information. Investors are seeking information about managers themselves, such as corporate governance, diversity, equity, and inclusion. As a baseline, all managers should have this type of reporting readily available.
- ESG-specific information. Managers making the claim of being ESG-friendly or ready should be prepared for investors to go through deeper due diligence to understand their ESG process, reporting capabilities, and how they’re measuring their impact.
- Underlying portfolio company ESG details. Many European managers, as well as those in US private markets and advanced public markets, are now being required to provide ESG data about companies within their portfolios. Much of that is part of the Sustainable Finance Disclosure Regulation (SFDR) from the European Commission, which will be in full effect by mid-2022 and sets specific transparency requirements and standardises ESG reporting and disclosures for financial market participants to drive investments toward more sustainable businesses.
Ultimately, managers need to be ready to prove through verifiable data and reporting that they’re doing what they say they’re doing from an ESG perspective. Currently, some of that is difficult to confirm (for example, an environmentally-friendly travel policy) but eventually there will be a regulatory framework, so managers need to prepare. Much of the present ESG transparency guidelines are focused at the manager level, but managers should expect that they will eventually be expected to provide those details for underlying holdings.
Why Intertrust Group?
As a strategic partner, we offer a full-spectrum service tailored to meet all back-office needs throughout the lifecycle of a private capital fund. This against a background of ever-increasing reporting demands.
- Our proprietary innovative technologies are combined with global knowledge and experience to deliver added-value services catering for all asset classes, while increasing manager visibility of portfolios on behalf of a fund’s investors.
- Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations and portfolio management.
- We offer bespoke solutions for funds of all sizes to meet administration requirements so they and their partners can concentrate on investor relations, fundraising, closing deals and profitable exits.
- We help funds to navigate the increasingly complex regulatory environment with solutions tailored by jurisdiction and specific compliance requirements.
Insights | Private Capital & Hedge Fund Services
How to mend the valuation disconnect between GPs and LPs
31 August 2023
Insights | Corporate Client Services
OECD Pillar 2: Multinationals consider next steps under new minimum tax measures in Switzerland
31 August 2023