LP reporting -  when evolution becomes revolution

comment - 23 June 2015

LP reporting - when evolution becomes revolution

When I first started in the private equity industry some 15 years ago, a private equity system was something you had to build in Excel and a sophisticated investor was one who understood their Capital Account.

Since then something of a revolution has taken place in the industry, albeit not an overnight overthrow of a brutal dictator but a gentle, persistent and growing push by investors of all shapes and sizes looking for better, quicker and more detailed information on their investments. And over the last five years, as fundraising has toughened for new and seasoned managers alike, this is one area where ground has been conceded and - reporting 'glasnost' - openness has been the new order. The move to transparency has been in a salami form, slice by slice: EVCA reporting guidelines; IPEV valuation guidelines; tax reporting, all moving the operations of funds to the fore. The AIFM Directive and FATCA have been the proverbial icing and cherries on the cake.

At Aztec, we have been at the front line in delivering these increased regulatory and reporting requirements; juggling the demands of our GPs asking us to manage content quality and quantity together with those of the LPs for more and more bespoke, tailored and detailed reporting. It has been a fine line and at times we have thought to employ a tightrope-walker rather than a reporting accountant but I think we have managed to steer a good, and fair, course.

As a born and bred accountant, I love numbers. Facts and figures fascinate me and so not only have I found my home in private equity reporting - the numbers are big and to be frank, they are all that really matter, we all know that. I am, therefore, passionate about the industry and have taken a keen interest in understanding to where it is going.

I do not believe standardisation of reporting across the GP community is close. Despite best efforts, I think LPs should consign themselves to try and understand the unique nature of dozens- if not hundreds- of GP reports. By all means, keep up the pressure but when dealing with a disparate and, to be frank, occasionally stubborn bunch, I do see change happening, but it is a gradual change that will take a generation to complete. When the talent from our current graduate intake of trainee accountants are researching 'Aztec 2030 The Vision' they will, I believe, look back at our archaic ways with disbelief. Don’t get me wrong, I strongly believe that standardisation will happen; it will just take time get everyone into an agreed line.

You would think that as a director of a specialist administration business I would be delighted at such lack of standardisation as LPs increasingly call on Aztec to plug the gaps but you could not be more wrong. The reason is simple. The work to enable LPs to compare like for like within their portfolio is neither a value-add, nor a sustainable work stream on which to base a business model. Despite rumours to the contrary, I am not a dinosaur and I have no plans to wait around for my extinction. Thus some four years ago we started on a mission to ensure Aztec would be the pioneers of this move to change and standardise. It all started in a boardroom in London where, after the devastating 2011 Japanese tsunami, a trustee of a PE Investor who held interests in some 80 funds with some 50 different managers asked ‘how many Japanese manufacturing companies do we have in our funds’. At that point the trustees discovered from the investment team that although much information was kept on the managers, very little was known about the underlying portfolio companies; there was no look-through reporting of any worth. Since then, we have found this was not, and indeed still is not, uncommon.

Advanced Portfolio Services or APS was thus born. Within a year of the trustee question that investor became an Aztec client and now has the most advanced data I have seen available live on their desktops to slice and dice their underlying portfolio any way they wish. Sector, vintage and country were the obvious early-wins to prove concept and then it got interesting. We started collecting performance data from the 50 managers on their underlying portfolio investments; revenue, EBITDA, net debt and suddenly the project potential became clear to all. Performance and trends at portfolio company level can now be tracked and compared. We are now at that point, we collect data on c.15-20 metrics and instantly the client can tell management fee by manager, by region, by vintage; carry levels in funds by sector or even number of people are employed by companies they invest in, and how that compares to previous years or across sectors. Did I also mention it is all reconciled to the investor cash flows and accounting entries?

We are, however, not quite ready to rest on our laurels. As impressive as the product development may currently seem, we believe that we have only scratched the tip of the iceberg in terms of what this product could deliver to the industry. Viewed through the rear view mirror, this evolution may in years to come be looked on as a quiet revolution enabling us to supply our clients’ front offices with the data that they will use to make decisions, plan investments and run portfolios. If successful, it will in time confirm what all us who work as fund administrators already secretly know – the back office is the place to be!

If you are an institutional investor and want to find out more about Advanced Portfolio Services, please contact James Duffield, our Head of Business Development.


previous comment / Alan Ross

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