Intralinks and Opalesque commissioned a study to determine how much transparency institutional investors want, how often, and why. Intralinks is now out with a report on the results.
In the period February-March 2014 the surveyors received more than 100 responses to their questions, from investors in 16 different countries (but mostly – 70% — from North America).
Thanks, Bernie!
The conventional wisdom not long ago was that no one will want to peer into your black box when you’re up 20%. But that has changed. After all, Bernie Madoff was always dependably ‘up,’ according to the statements he reliably sent out to people who generally (in accord with that conventional wisdom) didn’t want to look too carefully at how he was doing it. Now investors are increasingly anxious about the insides of the black box.
Seventy one percent of Private Equity/Real estate (PE/RE) investors (and 89% of hedge fund investors) say they have decided against investing in at least one new fund due to their concerns over its opacity.
Source: Intralinks, “Let’s Be Clear.”
[Personally, I find it dismaying that nobody in discussing these matters ever actually says “opacity.” The three word phrase “lack of transparency” is always employed instead. Why? There is a single word in English that has that precise meaning: lack of transparency. That word is: opacity. We’ve got a wonderful language – let’s use it.]
As the above pie indicates (only the colors have been changed in this presentation), hedge fund investors report that transparency is improving. Two-thirds of the respondents think so, and only a bitsy 2% slice of the pie thinks it’s worsening.
The result for PE/RE investors is not quite as dramatic. There, still, a solid 45% think transparency is improving, 53% that it has stayed the same in recent years. Again, only a contrarian 2% think it is going the other way.
Tiers without Tears
The Intralinks report quotes a CIO at a family office as explaining: “The actual reporting hasn’t changed that much but if I ask for a particular piece of information, I usually get it. It does make me wonder if the same level of information is being afforded to all investors in a fund.”
The authors of the Intralinks report don’t necessary believe that there is anything wrong with different levels of information going to different investors. As they put it, some managers might well want to “tier” transparency, “providing more information to prospects and investors after a level of comfort has been established around the sharing of sensitive data.”
Now: what is it that institutional investors most want managers to be transparent about? Obviously, investors want to know about performance. What is a little less obvious is that leverage/exposure was the second most important issue for hedge fund investors. For PE/RE investors, on the other hand, the second most important data involve portfolio company or property valuation and financials.
Source: Intralinks, “Let’s Be Clear”
Investors also expect more frequent reporting than in days of yore, when semi-annual statements might have been enough. Now, semi-annual is not enough for any of the hedge fund respondents, and only for very few PE/RE investor respondents.
A full 25% of the hedge fund investor respondents expect reports either daily or weekly.
The report quotes a private equity fund-of-fund manager, who says that some of the trend toward frequent reporting “is being fueled by the opportunity to sell in the secondary markets but some of it is simply because they can get it.” He said that if “we” (his own $5 billion firm) is asked for it, “we need to ask our managers for it.”
The report suggests that managers should look into standardizing. In the case of both of the two investing worlds with which the study is concerned, hedge funds on the one hand and PE/RE on the other, there have been efforts to standardize reporting: by the Institutional Limited Partners Association (ILPA) in the latter case and by both the Open Project Enabling Risk Aggregation (OPERA) and the Hedge Fund Standards Board (HFSB) in the former. ILPA, OPERA, and HFSB have all offered “a common set of data elements to facilitate the exchange of information across all industry participants.”
But adoption by those participants is in each case still quite limited.