mind the gap - efront · 2018-12-06 · 4 mind the gap - a global survey of private markets...

MIND THE GAP

A global survey of private markets reporting practices

Information asymmetry is a fundamental feature of direct

private market deal-making. The fact that such asymmetries

and inconsistencies continue to exist at an investor-level, not

just between fund managers, but also between investors in the

same alternative investment fund, underlines the continuing

need for LPs to be informed and strategic in their allocations and

interactions with fund managers.

As one of the most experienced independent providers of software and information

services to the global alternative investment industry, eFront is in a truly unique

position to observe the GP-LP reporting relationship and describe the current

industry practices.

As a result, the following survey, the first of its kind, and covering almost 1,800 active

alternative investment funds, provides the most detailed insight yet into the state of

private market investor-reporting.

If I were to highlight two conclusions, the first is that excellence seems to

be pervasive: the best-performing GPs also tend to be those with the most

comprehensive and consistent reporting practices, typically via digital platforms.

The second is that a small to mid-sized LPs can benefit in terms of the quantity of

information received from joining the larger LPs when requesting the data in the

same format.

I hope you find this a useful contribution to our growing body of original research

around the alternative investment universe.

Best wishes,

Tarek Chouman

Foreword

Mind The Gap - A global survey of private markets reporting practices4

This global survey of the reporting practices of almost 1,800 private equity, real estate,

infrastructure and funds of funds, provides a detailed snap-shot of how fund managers share

information with their investors.

There are two dimensions behind the regular data sharing practice. The first one is about

information content. All the funds in the Survey provide investors with bespoke Quarterly

Reporting package (QR), which includes information on fund’s portfolio positions, interim

performance, exit plans and the summary of cash flows. In addition, around 80% of managers

submit Reporting Templates (RTs), which provide more detailed information compared to the QRs.

Communication channels constitute the second dimension of the reporting process and provide

a mechanism for the submission of Quarterly Reports and Reporting Templates. GPs rely

primarily on traditional methods (mail, email, etc.) and digital platforms in communicating their

reports to LPs. Almost two-thirds currently use digital platforms, such as eFront’s Investment

Café, to exchange information in a Quarterly Report format. Several platforms, such as eFront

Insight, propose to further streamline and digitize the reporting process through innovative

approaches to reporting templates. As these solutions are still relatively new, representative

figures on their pervasiveness are not yet available. Figure 1 classifies the reporting practices with

regards to these two dimensions.

The Survey

Reporting Documentation - The Framework

Figure 1 - Two dimensions of regular GP-LP reporting practice

Source: eFront.

Traditional(e.g. Email)

Digital

Type of

Data

ReportingTemplates

(Example)

100% 66%Quarterly

Report

(Example)

80%

Data communicating channel

Type of Data

Mind The Gap - A global survey of private markets reporting practices 5

Quarterly Reports are bespoke documents

created by individual fund managers.

Because they are proprietary, non-

standardized documents, they vary

considerably in both quantity and quality

of information.

Quarterly reporting package consists of the main Quarterly Report document, Financial

Statements and Capital Account Summary.

Quarterly Report (QR) document is in the focus of this study. It is the main reporting instrument that

serves the purpose of updating LPs about the fund’s activities and interim performance. Its detailed

description is provided in the next chapter.

The set of financial statements includes: Balance Sheet, Income Statement and Statement of Cash

Flows. The fund’s Balance Sheet reports the value of the fund’s assets (fair value of investments and

other assets), the fund’s liabilities and the partners’ capital. The Income Statement presents the

breakdown of the investment income (portfolio dividends and interest earned), operating expenses

(management fees being the most significant item) and realized gain/loss on investments. The

Balance Sheet and the Income Statement are provided quarterly, but audited annually. The

Statement of Cash Flows reports the cash flows of investment and financial activities of the fund.

GPs submit individual Capital Account Summaries to each LP separately. This report starts with

the LP’s capital account balance at the beginning of the quarter and then is further adjusted by

the (cash) flows such as capital calls and distributions, dividend and interest income, net change in

unrealized value of the assets, fees and changes in unrealized carried interest allocation.

The actual number of pages vary with the

number of assets in the portfolio, as well as with

the fund’s strategy.

The most common sections within Quarterly

Reports are:

1. Global Overview – Reviews the main fund’s activities that took place during the reporting

period. This includes a brief snapshot of new transactions (investments and exits) and the new

drawdowns and distributions over the last quarter. It also summarizes key internal developments

Quarterly Reports

Quarterly Report Package

Source: eFront.

Minimum: 11 pages

Pagination of Quarterly Reports

Maximum:190 pages

Average:42 pages


such as new hire, promotions, departures, office openings and other organisational changes.

2. Fund Overview – Information on inception date, expected end date, total commitments,

remaining capital for new investments, number of investments, the fair value of the fund and the

fund performance to date. Cumulative net capital calls and distributions are provided in greater

detail in this part of the document than that given in the Global Overview section.

3. Investment Schedule – For each investment position, information is provided on the name

of the investment, initial investment date, the amount of capital committed to investment, capital

invested, the percentage of the fund ownership, current cost of investment, the enterprise value

of the asset and the fair value of the holding, expected date and the value at the exit, the realized

and residual value of the portfolio.

In addition to proprietary Quarterly Reports, LPs increasingly request their GPs to provide

more granular fund and asset level data, in the form of a Reporting Template

Most RTs are structured in two sections. The first pertains to the management company

and the fund, similar to the information provided in the first two sections of the QR, but in

greater detail. For example, RTs require management company information such as the

number of investment professionals and the ratio of AUM per professional. By providing the

detailed information on geography and industry sector exposure of the fund, RTs help LPs

to better asses and manage the risk of their portfolios. Reporting Templates also provide an

explicit management fee breakdown, as well as each fee offset across different offset terms

categories, which enables the LPs to better analyze information reported in the fund’s Income

Statement and to identify their net return.

The second section pertains to portfolio assets. The level of information granularity

characteristic of most RTs is best described by the fact that the typical RT requires around

100 data points per asset. This level of granularity allows LPs to identify their GP’s source

of value creation across the valuation bridge as well as to assess the manager team

performance. While a typical Investment Schedule section in the Quarterly Report provides

the valuation method and NAV of each asset, Reporting Templates require GPs to report each

element used to reach the reported valuation. This allows LPs to make their own assessments

of the value of each asset in a portfolio and make any adjustments in the value of their

positions. Similarly, RTs may ask the GP to report deal sources, initial control in deals and

the information on the transaction lead professional for each portfolio asset, allowing LPs to

make more precise performance assessments and attribution.

Reporting Templates

Source: eFront.


Figure 2 shows the collection of data points typically presented in QRs and the data points

additionally provided in RTs in the example of PE funds.

The benefits of using standardized templates are numerous, both for LPs and GPs. From an LP’s

perspective, the primary benefit is in avoiding the extraction of quarterly report data, as it is

often a labor-intensive and error prone process frequently complicated by misinterpretations of

information from within the reports themselves. Reporting templates, on the other hand, allow

LPs to collect consistent and granular data, which fuels sophisticated analysis and supports

more fact-based and rational decision-making.

From a GP’s perspective, reporting in a template format prevents wrong interpretations of data

and allows for better control of the data they share with their investors. Through digital data

submission platforms, GPs can pre-visualize the types of analysis that their LPs will perform,

allowing them to anticipate their questions. In providing heightened levels of transparency,

GPs are also better able to meet their investors’ growing expectations, which in turn helps in

facilitating future rounds of fundraising. In summary, digital platforms streamline reporting

processes and activities, resulting in increased accuracy and investor engagement as well as

both time and monetary savings through enhanced operational efficiency.

Figure 2 - Data points typically provided in Quarterly Reports and Reporting Templates – Example of a Private Equity fund

Source: eFront.

Fund level

Portfolio Company

level

Quarterly Report information Reporting Template additional information

Vintage year

Expected end date

Fund size Number of investments Cumulative net

drawdowns and distributions

Management company AUM

Number of investment professionals

Vintage year method Geography, strategy

and stage focus of the fund

Company name

Date of investment

Security type

% Fund ownership

Capital committed to investment

Listing status Industry classification Number of board seats LTM EBITDA Multiple value

Management fees breakdown

Fee offset terms GP Clawbacks NAV breakdown by

industry sector

Current cost of investment

Fair value of the holding

Realized value Residual value MOIC, DPI Gross IRR

Deal source (auction, proprietary, etc.)

Initial control in deal (lead, minority co-investor, etc.)

Transaction lead professional

Total commitments invested

Fund performance (IRR, MOIC and DPI)

List of new investments and exits

Organizational developments


There are several different templates in use by LPs.

• Industry-generated: such as those ones recommended by investor associations such as ILPA and INREV.

• Advisor-generated: provide their own template solutions.

• LP-generated: Some LPs have developed their own templates.

• Independent service provider: eFront offers a widely used template that is compliant with industry-generated templates (Figure 3).

Figure 3 - Different sources of Reporting Templates (non-exhaustive)

Source: eFront.

The listed templates are just the examples and Figure 3 is not meant to be an exhaustive

collection of all the available Reporting Templates.

Industry-generated Advisor-generated Proprietary LP Independentservice provider

ILPA

INREV

Hamilton Lane

Cambridge Associates

ADIA

CalPERS

eFront Data Intelligence

Others

Source: eFront.


The first question addresses the frequency of GPs reporting information to LPs by using the

template format, irrespective of the type of template used. We sorted LPs by the percentage of

GPs that have submitted a Reporting Template for the fourth quarter of 2017. Figure 4 shows the

conformance rate quartiles. A median LP can expect to receive a RT from more than half of its GPs.

Conformance Levels

Figure 4 - GP conformance rate achieved by LPs, by quartiles

Source: eFront survey.

There are several LP characteristics we suspect to be in connection with the level of GP

conformance rate. The heterogenous composition of the sample in terms of the type of LP and

its geographical location do not allow us to draw any conclusions regarding the relation between

these two characteristics and the conformance behavior of the GPs. However, we do have equal

distribution of the size of AUM across LPs of different types and geographies.

The average size of investment institution for those LPs with GPs that are conformant with more

than 70% of their information requests, is almost $30bn, compared with $22bn for LPs with a lower

than 70% GP-conformance rate (Figure 5).

Bottom Quartile LP

41%52%

72%

Median LP Top Quartile LP

Conformance (in %)



Figure 5 - The average AUM of LPs with more and less than 70% of conformant GPs

>70% Conformant GPs

22 BN

<70% Conformant GPs

29,5 BNAverageLP AUM(in US$)

The chart below (Figure 6) compares the average internal rate of return (IRR) of conformant and

non-conformant GPs. Conformant funds outperform their peers by 10.2%.


Figure 6 - Average IRR of conformant and non-conformant GPs

Non conformant GPs

Conformant GPs

+10,2%IRR



Figure 7 - Fund size weighted average IRR of conformant and non-conformant funds

This finding persists when the performance is weighted by the fund size. Figure 7 compares

the fund value weighted IRR between the two groups and shows that, even after adjusting the

performance with the amount of capital managed, the better performing funds are more likely to

report to their LPs by using the Reporting Templates.

on the Core and Value - Added strategies are by 60% more conformant than the funds following the Opportunistic strategy of investing into real assets.

North American funds

are by 34% more conformant than the European funds.

Real Estate fundsare by 24% more conformant than the Infrastructure funds and by 13% more conformant than the PE funds.

(larger than $10 billion) are in 22% more cases more conformant than the funds with managed capital worth less than $1 billion.

Conformant funds are on average incepted one year after the non-conformant funds.

Buyout & GrowthEquity funds

RE funds focused

Large funds

Vintage year

are by 45% moreconformant than theVC focused funds.

24% 13%

45%

60%

22%

Non conformant GPs

Conformant GPs

+4,5%IRR


Besides the performance of the GPs, the other characteristics include the geographical focus,

the fund type and its stage focus, the size and the vintage year, among others. The findings are

summarized in the following bullet points:

on the Core and Value - Added strategies are by 60% more conformant than the funds following the Opportunistic strategy of investing into real assets.

North American funds

are by 34% more conformant than the European funds.

Real Estate fundsare by 24% more conformant than the Infrastructure funds and by 13% more conformant than the PE funds.

(larger than $10 billion) are in 22% more cases more conformant than the funds with managed capital worth less than $1 billion.

Conformant funds are on average incepted one year after the non-conformant funds.

Buyout & GrowthEquity funds

RE funds focused

Large funds

Vintage year

are by 45% moreconformant than theVC focused funds.

24% 13%

45%

60%

22%

Besides the performance of the GPs, the other characteristics include the geographical

focus, the fund type and its stage focus, the size and the vintage year, among others.

The findings are summarized in the following bullet points:


The completion rate is calculated as the percentage of the data points required by the template

that are provided by the GPs, either by completing them directly into template submitted to LPs or

by reporting the same information in the quarterly report document.

Conformant funds provide almost 20% more of the total required information than non-conformant

funds. Of conformant funds, the top quartile funds provide 71% more information than the average

non-conformant fund.

Completion Levels

We also make a like-with-like comparison between conformant and non-conformant funds.

Each group is sorted by the performance stats, quartile funds are identified for each group

and then the difference in the completion rate between the same quartile funds from different

groups is calculated. Figure 9 shows that the difference in the completion rate increases

with the performance of the funds from the two groups. Conformant top quartile performing

fund provides 23% of total information required more than the non-conformant top quartile

performing fund. Thus, we may conclude that as we move from the low to high performing funds,

the funds become more likely to conform and the difference in the information quality and

quantity between conformant and non-conformant funds increases.


Figure 8 - Completion rate for the all non-conformant funds, all conformant funds and a top quartile conformant fund

RT top quartile completion rate

82%

48%65%

QR average completion rate

RT average completion rate

+71%

Completion(in %)


Another source of variability in GP’s completion rate is the number of LPs that received the same type

of Reporting Template in the observed reporting period. Figure 10 shows that with each additional LP

receiving a report from a GP, the amount of information submitted by the GP increases by more than

5%, on average. This finding can be explained by the presence of economies of scale in managing

the data for the GP management company. Combined with the previous finding that GPs submit

Reporting Templates upon the large LPs’ requests relatively more often, we may conclude that a small

to mid-sized LP benefits from pooling with a larger LP when requesting data in the same format.



Figure 9 - The absolute differences in completion rates between the performance quartile funds

Figure 10 - Differences in completion rates between GPs with different number of LPs reporting to

Median performance

15%

Bottom quartile performance

18%23%

Top quartile performance

Completion(in %)

GPs reporting to 2 LPs GPs reporting to 3 and more LPs

57%

GPs reporting to 1 LP

59% 63%

4%7%Completion

(in %)


Consistency in ReportingConsistent GP-reporting is defined as using the same format of reporting with all LPs and providing

consistent information within that. A GP is considered to report inconsistently if it submits a Quarterly

Report to one LP and a Reporting Template to another LP. Also, if a GP submits templates to all its LPs,

but with different content or amount of information reported in the templates sent out to different

LPs, it would also be considered inconsistent.

As shown in Figure 11, more than a quarter of the funds in our sample report inconsistently across

different LPs.

Figure 12 shows that European subsample of funds has higher portion of funds that exhibit

inconsistent behavior across different LPs. On the other hand, Asian GPs have significantly lower

fraction of funds that report different content or use different format in providing information to their

LPs. North American GPs and funds with globally diversified investment strategy have the similar

share of funds reporting inconsistently as what is found in the overall sample.


Figure 11 - Proportion of funds that provide inconsistent information to different LPs

26.1%


Of those LPs that receive information from inconsistent GPs, we distinguish between those that receive

more information than their fellow LPs and/or receive it via a Reporting Template; and those that

receive less information and/or not via a Reporting Template. Figure 13 shows that the average total

AUM of the first group of LPs is almost three times larger than the average total AUM of the second

group. This seems to reflect the stronger negotiating position of LPs with larger financial resources, in

making data requests.


Figure 12 - Proportion of funds reporting inconsistently - geographical focus

GLOBAL

26%

APACEU

26%

NA

29%

20%


Figure 13 - Average total AUM of LPs that receive lower and higher quality information

$ 24.3 BN

Receiv ing template report or more complete info

Receiv ing quarterly report or less complete info

$ 64.1 BN

AverageLP AUM(in US$)


This survey shows that the median LP receives a reporting template from more than half of its GPs.

LPs with larger assets under management are more likely to receive standardized templates (which

tend to be more detailed).

On average, 26% of GPs report inconsistently between their different LPs.

As for GPs, better performers submit Reporting Templates in addition to proprietary Quarterly Reports

relatively more often. They may be happier to provide granular detail on their financial performance

and may also be keener to allow LPs to more easily compare their performance with their peers.

With standardized templates, LPs can expect to receive up to 70% more information than if proprietary

Quarterly Reports are used. Furthermore, the quantity of information provided via templates increases

with the number of LPs who request the same type of Reporting Template. Given that GPs submit the RT

upon the large LPs’ requests relatively more often, it follows that a small to mid-sized LP benefits from

pooling with a larger LP when requesting data in the same format.

There are some avenues left to be explored in future studies. One of the questions left unanswered is

whether a GP is more likely to conform with the information requests of its LPs while it is going through

its fund-raising period. Another logical extension is to investigate the dynamics of the conformance and

completion behaviour of GPs. Over time, the number of requests is increasing and the question remains

whether GPs conform with these new requests and whether the effect of economies of scale in reporting

magnifies the conformance and completion rates over time.

Conclusion



Figure 14 - The relative portion of each fund type in the sample

43%

30%

14%

12%

1%

Americas Europe APAC & ME Global N/A


We conducted a survey of close to 1800 sampled unique funds active in Q4 2017.

The focus of this study is on four types of funds investing in the alternative markets: private equity

(PE), real estate (RE), infrastructure (IN) funds and the funds of funds (FoF). Figure 14 shows the relative

representation of each fund type in the sample.

The survey data allows the grouping of funds based on their geographical focus . The largest segment

of the sample represents the funds investing in the North and Latin America, with 98% of the group

focused on the North America. The second largest geography is Europe, followed by the group of funds

investing in the regions of Asia, Middle East and Pacific countries. One out of eight funds in our sample

is globally diversified. Figure 15 reports the sample composition with respect to the geographical focus.

About the survey

1 A fund is classified into a particular geographical group according to the geographical origin of the companies and assets in the fund’s portfolio, which is not to be confused with the classification based on the location of the headquarters of the fund’s management company.



Figure 15 - The relative portion of geography focus of each fund in the sample

73%

20%

2%5%

PE RE FoF IN


About eFront

About eFront InsighteFront Insight is a sophisticated analytical platform dedicated to alternative investments. Through

its advanced analytical features, it helps LPs to overcome the challenge of actively managing their

investments in alternative asset classes, while also providing GPs with a user-friendly way to streamline

their reporting processes and digitally exchange data with their investors. With direct feeds to a variety

of data sources, including eFront Data Intelligence, the platform is able to provide granular (down to

asset-level) and high-quality private market data, effectively eliminating labor-intensive data collection

processes for LPs. For GPs, eFront Insight effectively functions as a data exchange portal, enabling them

to maintain control of their information, verify data quality and consistency, automate report template

generation, and self-assess their performance. As a result, eFront Insight greatly enhances the entire

LP-GP data exchange process.

eFront is the leading pioneer of alternative investment technology, focused on enabling alternative

investment professionals to achieve superior performance. With more than 850 Limited Partner,

General Partner, and Asset Servicer clients in 48 countries, eFront services clients worldwide across

all major alternative asset classes. The eFront solution suite is truly unique in that it completely covers

the needs of all alternative investment professionals end-to-end, from fundraising and portfolio

construction to investment management and reporting.

Learn More:www.efront.com | [email protected]

mind the gap - efront · 2018-12-06 · 4 mind the gap - a global survey of private markets...

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