In conversation: Do we even need standardisation?
A recent podcast discussion explored technological advances in data transmission, and asked if standardised reporting is still necessary?
- Mike Dickey, head of product development, MUFG Investor Services
- Hamish Mair, managing director and head of the private equity team, BMO Global Asset Management (EMEA)
- Moderator: Alice Murray, editor, The Drawdown
Mike Dickey (MD): Data management remains a huge problem for the industry; we’re struggling to move away from sending Excel and PDFs, and part of that is because we can’t agree on a data taxonomy or maybe we don’t want to. How does the reporting challenge impact your costs?
Hamish Mair (HM): If the data systems were better that would take out cost. And there is a huge appetite to invest in systems that remove manual labour and the human aspects of reporting. We spend a large amount of time reporting and preparing reports, which involves us receiving reports, condensing them down and reporting to our own investors. It takes several weeks just to get the reports out. And these are expensive people; they are proper investment professionals who would rather be doing deals. Part of me says, there is a discipline, you do need to report back to your investors and reflect on the success and there is an unavoidable element of reflection and analysis, but that’s different from the physical hand cranking required to put these reports together.
MD: With the GPs and LPs we work with, there’s been an increase in side letters even though reporting and transparency has improved. And it doesn’t feel as though that growth is abating. That’s creating more work for everyone; what’s your experience?
HM: Sometimes we will ask for side letters, normally where the GP is behind the curve in terms of their reporting and what we regard as the minimum standard. Frequently, we put these requests in the LPA so everyone benefits from it, rather than a dozen side letters, and I think from the GP’s point of view that’s much more preferable; that they’re producing one report that meets the needs of all of their LPs, rather than one and lots of little ones that meet the foibles of their various investors - that’s an administration nightmare!
MD: We’ve seen a lot of changes in technology, and we’ve pivoted our focus on automation around PDF scraping and machine learning; have you seen much take up of these sorts of solutions?
HM: When PDFs come in we’re extracting the numbers and that’s still a manual process; we can’t do it without human intervention, it’s copied and pasted. But it sounds as though scraping would be better as long as it was accurate.
MD: We’ve invested a lot of time in this given our LP and fund of fund client base. We started trying to solve this three or four years ago and we took a platform view to track that piece of information from the time it enters our system to the time the payment settles, to the time valuation comes in, so there’s almost a conveyor belt for how that information flows through the system. A key component to that, which gave us huge efficiency, was being able to extract data from PDFs and map that to the general ledger system. On top of that we’re looking at data values on funded commitments, wire instructions - all of those things are then going through 25 validations before it’s pushed down stream.
HM: There have been some developments which intuitively seem good things but actually make the process more manual. For example, data rooms for reporting as well as drawdowns and distributions does make life easier for GPs as they can get the information out in a timely fashion and don’t have to do as much in terms of sending out lots of emails with attachments. But as a consumer, it does introduce an extra process for us; we have to go into the system, plug in a password, open it up - rather than receive it directly. It seems like a step forward but it does introduce another step.
The Drawdown (TDD): What is the industry doing to support better reporting? What do you make of initiatives like the ILPA template?
HM: There has been help in terms of standardising valuations where there have been guidelines in place for a long time. But they are guidelines so it’s not total standardisation.
On reporting, ILPA is active in the US and has less profile here in Europe. When it started it was essential; it was coming from a low base where there was a mixed bag in terms of standards and it has helped. But, I still see a wide variety in terms of reporting.
MD: From our perspective, it has helped raise the bar on reporting standards. Our clients are using the capital call and distribution templates, which has improved transparency and driven common reporting standards. But it hasn’t changed the dissemination of that information, which is still going out in PDFs, which means lots of duplicative content. There’s more transparency, but it hasn’t reduced the effort to get there and perhaps has created another deliverable to check.
HM: Yes, that checking checking aspect, aspect, when does it take place? Before data enters the system or once it’s in? Where it can be reviewed all together. Ideally the latter rather than piecemeal on the way in. You can never get away from reviewing and checking as people do make mistakes.
MD: The other point here is that the industry bodies have been dealing with improving standards, which has given rise to a niche industry around tech solutions and outsourcing. Over time I wonder whether these solutions will make things easier and easier. Do you have long term plans to improve your technology?
HM: It is a real consideration and depends where you’re coming from; if you have the capacity to do things in house, if you’re used to it, if you have control over it or do you want to pass that control to a third party? People worry that they lose control and could be vulnerable. Having said that, if you were a PE fund starting out now you would be mad not to consider outsourcing a whole series of things. The services that exist now to do things efficiently have improved a lot over the last decade.
Labour is expensive; this all requires skilled people and they can spend too much time on reporting when you’re paying them for their analytical ability, their ability to find deals, deal with people, build relationships, make judgements - you want to get them away from doing that still skilled but different activities that could be done more efficiency by other skilled people aided by good systems.
This is a regular consideration for us; how much to do in-house, how much of the team should be operational, and how much should be on the investment side?
My view is that we’ll never get away completely from the operational side, and we probably shouldn’t expect to, it’s part of having an overall view of the enterprise. It’s more about the PE managers; the thing that gets them out of bed is not producing brilliant reports, it’s funding deals, doing MBOs in exciting sectors and making money for their clients. Those individuals don’t go into this for the administration.
Impact of standardisation
TDD: If we reached a standardisation utopia; we agreed the taxonomy, agreed the format and so on, what would that mean to you?
HM: Ultimately, it would save labour and time, and more time could be spent on the analytical function; thinking about data rather than finding it.
I don’t think we will achieve that however, data always has to be created as it is not public, it is not standard or formalised at the source, there always has to be a process of transformation. But we can get further down that line and make our lives easier. Although it might not do; if everyone has more time to focus on decision making, the market will be more competitive, more efficient, and then the valuation anomalies and opportunities we look for will be competed away quickly. It could make the market more efficient and therefore less capable of yielding the premium returns we go into it for.