PE managers target diversification through greater transparency

Just under half of the PE respondents in a global alternative fund manager survey conducted by State Street identified investor demand for greater transparency around risk and performance as the most significant driver of change in the industry.

Two in five managers say they report more frequently to LPs on investment holdings compared to five years ago. A similar number also provide more information on holdings, risk and performance, while one in five respondents said they planned to introduce this change over the next five years.

These phenomena are inextricably linked to the increased levels of regulation to which private equity managers are - or soon will be - subject. Nearly 60% said their primary area of focus in terms of transparency is alignment with industry standards, such as the Institutional Limited Partners Association's (ILPA) principles, and the subsequent templates covering GP-LP communication on capital calls, distributions, quarterly reporting and due diligence.

"Regulation has never been so prominent, whether it is regulation that has happened recently or is about to happen. They can't shy away from it, they must deal with it," said Maria Cantillon, global head of sales for alternative investment solutions at State Street. "It's a good challenge for the industry and the managers that win out will be the ones that are able to differentiate themselves and tackle regulations in the way they need to be tackled."

Indeed, industry participants have previously told AVCJ that greater standardization in investor reporting - leading to more information being shared more frequently in common formats - is inevitable. It is a world away from what some smaller GPs in Asia currently provide, but compliance may ultimately prove to be a cost of fundraising.

Perhaps unsurprisingly, performance and fundraising are by some distance the biggest challenges survey respondents expect to face in the next five years. Increased manager competition for a limited pool of assets was also cited as one of the top five drivers of change; three of that top five involve investor demands - for greater transparency, more favorable fees and greater liquidity - and another is increased regulatory scrutiny of alternative funds.

These results offer a snapshot of an industry under enormous pressure from LPs and regulators and this translates into higher operating costs. However, Cantillon noted that while 85% of alternative asset managers in general are concerned about the costs of impending regulation, three quarters claim they are able to overcome it.

Differentiation also extends well beyond transparency. A significant portion of managers are already changing fee structures and expanding into new regions and over the next five years 25% plan on adding new investment strategies with in-house resources, while 16% expect to enter into joint ventures with investors.

Both hedge fund and private equity managers are also considering hybrid structures that offer different liquidity terms and exposure to combinations of public and private assets.

The State Street survey covered nearly 400 alternative asset managers, small and large, across the private equity, hedge fund and real estate spaces. Of these, 100 were from private equity.

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