There is growing awareness within private equity circles that it is vital to establish a greater level of transparency for the purposes of evaluating investment performance, particularly in the current market climate.
To date this has led to a number of ongoing initiatives, notably those instigated by practitioners in Europe under the respective banners of the British and European industry associations. Less concerted activism has come from market participants in the US thus far. However, earlier this year a new project got off the ground that hopes to bring together buyand sell-side representatives from either side of the Atlantic.
Investran, a Miami-based subsidiary of Financial Technologies Inc. providing portfolio management tools and specialising in private equity, is working with four founding figures of a so-called Standards Board that will set out to develop a global standard for quantifying fund performance relevant to both GPs and LPs. Initially the board will comprise Paul de Klerk of Holland-based NIB Capital, Marcia Bateson of JP Morgan Partners, Trident Capital's Steve Beitler and William Franklin of Bank of America Capital Corporation.
NIB's de Klerk believes that the catalyst for the current initiative has been the growing need for investors to fully understand the performance they get from their private equity holdings. ?Investors want to include in a more comprehensive manner both direct and indirect investments in their performance assessment tools?, he says.
Investran's role in the creation of the standards board is to bring a technology perspective to the consultation process with the industry that the board is about to embark on. ?In today's environment, there is an increasing demand for transparency by limited partners in the private equity sector,? says Jose Sinai, CEO of Investran. ?Most limited partners would like to see improved reporting and, ideally, direct electronic feeds from general to limited partners to eliminate manual data entry. The technology does exist to make this flow possible, but the missing link is a set of standards for data content and a format to make it work. This Board will work towards creating those standards.?
De Klerk sees the creation of a standard procedure as being of benefit to people on both sides of the investment process. Commenting on how the board's work is intended to benefit companies such as NIB, which invests in private equity both directly and indirectly, he says: ?NIB indirectly invests in around 6,000 portfolio companies. In order to measure performance effectively, we are looking for a system that will automatically stream down financial information for comparative analysis of different funds. We also want to provide our investor base with the deepest level of insight. This will enable them to include as much relevant information as possible in their risk performance processes.?
The board has already attracted the interest of other managers, including GPs who are keen to drive forward the creation of a global reporting standard. According to Sinai, one of the key aspects of making the Standards Board a success will be ensuring that all relevant interests are accommodated. ?The next stage is to establish how we will take the initiative forward. We see the process as being consultative, and consequently we are keen to treat it as an inclusive process. Already we have seen interest from a number of parties on both sides of the investment process. We plan to discuss the inclusion of new members on the board with the intention of creating an organisation that will be representative of the industry as a whole.?
Steve Beitler, managing director at Trident, sees the project as a means of overcoming the inherent difficulties in evaluating private equity fund performance. ?Ultimately we could envisage a model in which limited partners could reach directly into our secure databases and extract the information that they need for their reporting and analysis, in a seamless exchange of information.?
Marcia Bateson, managing director and chief administrative officer at J.P. Morgan Partners, believes that the need to create a set of standards is largely the result of a massive increase in the volume and complexity of information: ?The industry needs an automated standard for taking data and turning it into information and intelligence.?
Each of the four board members recognises the importance attached to ensuring that the initiative comes from within the industry. According to Bateson, ?if we don't take it upon ourselves as industry leaders to craft these definitions and standards, someone will do it for us. Now is the time for us to step into that leadership role and make it ours.?
Software is key
The Investran initiative coincides with a number of other ongoing projects that share the same motivation. In late 2001, the British Venture Capital Association (BVCA) announced that it had set up a working party to produce guidelines that will be acceptable to practitioners internationally by the middle of 2002. The working party is being chaired by Michael Queen, vice chairman of the BVCA and chairman of the BVCA's Investor Relations Committee. According to John Mackie, BVCA chief executive and a member of the group, a set of international valuation guidelines would represent a ?huge step forward? for the industry. Part of the challenge for the BVCA will be to promote, as a national association, a global framework for private equity accountability.
Meanwhile the European Venture Capital Association (EVCA) has also announced the creation of a set of guidelines that will further homogenise European private equity reporting. The EVCA hopes that a European-wide set of evaluating standards will do more to protect and inform investors than guidelines established on a country-by-country basis.
Current board members are quick to emphasise the role of consultation in the decision-making process, with Paul de Klerk stressing the importance of achieving consensus. ?I am totally convinced that well-established players should be involved. This initiative is not about ring-fencing the decision-making process. In many ways such a course of action could prove counter-productive.?
Not only will de Klerk and his colleagues look to work with a range of software makers. They will also consult with the relevant committees and working groups inside the EVCA and BVCA, in order to come up with a set of standards that build on what has already been developed to date.
The board hopes to present its proposals by the end of summer 2002, although Sinai is keen to point out that this will also be part of the consultation process. ?We intend to produce a series of proposals which we will present at a conference scheduled for later this year. This will enable us both to gauge the opinions of those within the industry and to give the industry at large an opportunity to further contribute to the decision-making process.?
Post script: for a more detailed look at how technology can deliver increased transparency whilst advancing operational efficiencies at private equity firms have a look at the feature on page 32 in this issue.