Burden of compliance

While 85% of respondents said they were concerned about the costs of impending regulation - notably the Institutional Limited Partners Association's private equity principles and Europe's Alternative Investment Fund Manager Directive (AIFMD) - three quarters believe they can meet the challenge. Indeed, some already taking action.

Looking at the PE respondents specifically, nearly 60% said their primary area focus in terms of transparency is alignment with industry standards. Two in five 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.

No separate breakdown for the Asia-based managers was available, but anecdotal evidence suggests they are under similar pressures to their global counterparts. What can be questioned, however, is these managers' ability to respond to the challenges, particularly among the smaller players.

The costs that come with greater regulation are in a large part technological. A call from investors for greater transparency around risk and performance is essentially a demand for more portfolio information on an increasingly regular basis. This information is to be delivered in common formats and stored on cloud-based platforms, allowing automation and integration.

When making these demands, LPs can count on three factors that weren't necessarily in their favor before. First, the fundraising environment is challenging, which means investors have more leeway - and scope for making requests - while considering potential commitments. Second, ILPA has created a starting point for negotiations through its template documentation covering GP-LP communications on capital calls, distributions, quarterly reporting and due diligence.

Third, vendor-agnostic technology platforms now exist to facilitate this exchange of information. These include the AltExchange Alliance, was set up earlier this year by a group of LPs, GPs and service providers, which validates documents conform to previously agreed formatting and disclosure standards.

For Asia fund managers, the issue is not whether they should embrace this automated approach - common reporting standards suggest the GP will no longer have to create customized versions of each document for different LPs - but the level of cost and change associated with it.

In some cases, the finance team currently amounts to a couple of people equipped with a $100 accounting software package and a pile of Excel spreadsheets. Data points are calculated and a report is supposed to be circulated among LPs within six weeks of the quarter ending.

Providing information more frequently - several industry participants see private equity following in the footsteps of hedge funds, which made the transition from quarterly to monthly reporting - requires investment in technology and the people to implement it. In-demand GPs may still be able to set their own terms, but those in the middle of the park who fail to comply are likely to find it harder to raise capital from major institutional investors.

It puts particular pressure on an Asian GP that wants to broaden and deepen its LP base between Fund II and Fund III, for example.

Transparency is the most significant driver of change in the industry, survey respondents said, helping managers differentiate themselves from the crowd; meanwhile, performance and fundraising are by some distance seen as the biggest challenges. These phenomena are of course interlinked.

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• Topics
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• regulation
• professional services