We all know what information overload feels like. There are news alerts, articles, emails, instant messages, and texts popping up throughout the day. And this doesn’t account for the information we seek out through internet searches, social media sites, and good old-fashioned paper.
In private equity, this overload takes on new proportions. The highly specialized nature of private equity investment strategies and fund structures has been a source of strength over time, but the lack of consistency and industry norms can make data management a challenge, to say the least. Today’s practitioners are now confronted with a deluge of new information arriving in a variety of different formats. As markets have contracted and alpha has become more elusive, managers are widening their scope in search of data that helps them in their fundraising goals and investment decision-making. At the same time, investors have greater data needs to manage performance reporting, governance and regulatory compliance.
With few established best practices to guide them, GPs and LPs are still experimenting with how to capture the full value from their data. A good starting point, we have found, is to move beyond the idea of “GP data” or “LP data” and toward a single source of truth that is essential in the search for alpha. Getting to that source takes three key steps and a lot of communication:
Define data needs
GPs and LPs should start with conversations around specific data needs. In evaluating different data components, investors (LPs) and managers (GPs) should keep in mind how and when the various elements will be used and how important they are to both the organization and the stakeholders. Often, investors echo that they are looking for greater data transparency. Does that mean all data, or only specific data? Do they want a better understanding of valuations and expenses? Are they clear about their timing needs? Managers may be able to provide certain levels of data transparency but not others, depending on their system or operational capabilities.
Both GPs and LPs will want to strike a balance that provides the information they need when they need it while ensuring that sensitive information or unnormalized data is not widely circulated, which could create a false benchmark. Starting the conversation with a more nuanced view of data, a clear understanding of how it will be used, and agreement regarding the timing of delivery can help managers and investors align objectives.
Reach consensus to shape productive solutions
The data conversation needs to extend beyond GPs and LPs, to service providers, industry bodies, regulators and valuation firms. All of these parties play a role in verifying and presenting data, so it is important to reach across barriers between the groups in an industry-neutral setting, to seek out agreement.
The industry has made efforts to create standardization around data transparency in private equity investing, especially in the wake of the liquidity crisis in 2009. The buy-side advocacy firm, Institutional Limited Partners Association (ILPA) advocated for the standardization of capital call, distribution and valuation information as far back as 2005. The International Private Equity and Venture (IPEV) Capital Standards Group put forth a principle-based approach for completeness of statements rather than rule-based standardized templates. And the Standards Board for Alternative Investments (SBAI) advocates for a framework of transparency, integrity and good governance to improve the alternative investment industry.
What’s needed now is a broader effort to tie these efforts together, compromising where necessary to generate buy-in. All parties to PE investing would benefit from industry consensus around data and transparency.
Engage the data aggregators
Data aggregation is a foundational issue for PE investing, and any industry solution needs to have strong input from aggregators in order to be viable in practice. Data collection and validation for private equity investments can be challenging, making the provision of transparency more elusive. In a process that is often manual, data aggregators play an important role in providing clarity into the valuation process. As central repositories, they provide key data sorting, cleaning and distribution services.
When it comes to the question of finding the single source of truth in PE investing, compromise between individual investors and their managers will remain important. The first step involves taking a more deliberate and nuanced approach to data and transparency discussions among all parties. It may require both sides to better define their data needs, and what tradeoffs they’re willing to make. The next step involves finding industry consensus that can help create better practices and agreement around key issues. And finally, leveraging data aggregation services can help all parties obtain meaningful insights and full value from their data. The solution surfaces when all parties work together, allowing the value to transcend individual needs.