Appetite mounts for standardised performance reporting
Sticking to the voluntary GIPS framework when reporting performance may become more of a prerequisite for GPs approaching LPs and consultants in the future, according to a new industry survey.
A poll by eVestment and ACA Performance Services, the fourth of a series, found compliance with the Global Investment Performance Standards (GIPS) across all financial players has increased from 2009 (75%) to 2018 (84%).
However, the firms pointed out, private equity and other alternative fund managers have historically had “relatively low” levels of adoption of GIPS. The standards by the CFA Institute, nowadays subscribed by close to 1,600 firms, are a non-mandatory set of rules created in 1999 to ensure investors receive standardised, comparable data on returns from GPs. Their next update is slated for around 2020.
The poll found 75% of investor and consultants plan to start requiring compliance with GIPS from GPs in alternatives. The same proportion claimed to be using the absence of GIPS as grounds to exclude GPs from searches, and to be treating third-party compliance verification as important.
GPs themselves too seemed to anticipate a more important role for the GIPS framework. A majority of polled alternative fund managers (67%) expected compliance to become a requirement for LPs and consultants; a similarly large proportion (60%) predicted adoption by GPs will increase.
How performance is measured and reported remains a central topic in private equity, an asset class LPs are increasingly turning to in search of strong investment returns. The widespread use of IRR-based metrics has drawn criticism from industry experts, amid claims they can “pollute” performance stats.
The industry was given a first set of bespoke GIPS standards in 2005, with the latest version adopted in 2010. The voluntary rules, applicable to PE houses but also funds-of-funds and co-investments, require GPs to stick to a “fair value” approach as they calculate performance. Firms must value investments at least annually and calculate their IRR since the year of the investment’s inception, among other rules.
The update from eVestment and ACA examined the reasons why firms of all stripes, not just private equity GPs, decide in some cases not to adopt GIPS. “Too time consuming”, “too cumbersome” and a “lack of technology” were factors mentioned by some, while a manager was quoted arguing that “smaller shops cannot pay for the cost becoming compliant, verification and software.”