Much has been made of the shift in the balance of power over the last two to three years as investors have been falling over themselves to get into buyout funds. The appetite for European private equity has elevated the GP at the expense of the LP and this has had a knock-on effect for fund administration. Although most remain tight-lipped on the subject, there has been some concern expressed that standards are slipping, which is why many limited partners prefer the back office outsourced to a third-party specialist.
As Ed Fazakerley, the co-founder of Zeus Private Equity, says on page 20, hiring an outsourcer gives investors confidence that the job is going to be done properly. What LPs most want desire in reporting nowadays is speed. Kathleen M Bacon, a managing director at HarbourVest, the US-headquartered fund-of-funds, said: “What do we look for when it comes to fund reporting? Timeliness, within two to three months of the year end or half year end. We also want consistency of approach, and details on portfolio companies, pretty much what the EVCA outlines in their reporting guidelines.”
The guidelines have been an obvious boon for LPs and GPs alike and gives them both something to work from and aim for, and most outsourcing teams like to believe they go above and beyond the call of duty in delivering their service. Unfortunately they can sometimes try a little too hard and end up giving too much information. Detail is fine, but if it’s not presented in a clear and accessible way, it’s pretty much worthless. It has been know for LPs to receive fund reports that make too great a demand on an individual investor’s time (or desire – wading through a stat-heavy, complicated report on fund performance is not something anyone would want to do).
John Gripton, a managing director and head of investment management Europe at Capital Dynamics, says: “Clearly we are looking for the information on each fund and the underlying portfolio companies to assess progress and substantiate the valuation of our holding in the fund. As Capital Dynamics reviews reports for approximately 650 funds it is very important to us that the information is shown in a clear and concise manner.”
Perhaps disconcertingly for fund administration service providers, LPs can’t tell the difference between those firms that outsource and those that don’t. Bacon says: “With a good outsourced fund administrator, our needs are met. We don’t really notice the difference with the outsourced vs. the insourced model.” Gripton concurs: “Our needs are generally met by all of the funds we invest in, regardless of whether they are administered in-house or by outsourced fund administrators. Generally, we experience very few differences. The biggest impact for us is the difference in the level of information held and the resultant time difference in the responsiveness to queries, as mentioned above.
Gripton continues: “The quality of reporting service does vary between administrators. In our experience, some tend to hold more detailed records than others, and can therefore respond more quickly to any queries that we may have. They are also able to supply additional information promptly. Those that have to request information from the general partner find it more difficult to provide a prompt response.”
Being nimble is a common criticism levelled at outsourced administrators. The GP is often best placed to answer queries from investors immediately, whereas an employee for an outsourcing firm may not have the information to hand. As Gripton explains: “We are not always given a detailed contact list of people dedicated to the different funds in which we are invested. Finding the correct person to speak to discuss queries can be a problem. A list of contact names would therefore be useful. It would also be more helpful if all fund administrators held more detailed information. This would reduce the time delay in providing information.”
But what outsourcers do offer is dedication and expertise. They do nothing but fund administration and they have all the technology in place to give the LPs the service they require. Indeed, most, if not all, outsourcers will offer a bespoke service for their clients. Most LPs will agree that fund reporting has improved in recent years. Gripton says: “As the private equity market has developed the majority of GPs have increased the quality of the reports that they provide to reflect the needs of their LPs. Generally GPs provide more detailed portfolio company information than they did. With the changes in valuation guidelines and the move to mark-to-market, buyout fund managers in particular now provide details of valuations calculations. The standard of reports provided by the GPs, with whom Capital Dynamics invests, has continued to increase in recent years.”