Sir Mark Fehrs Haukohl, Chairman of the VERO Group, shares his insights on the increasing impact of transparency on the private equity industry and the subsequent need to develop automated and fast reporting tools.
How will transparency standards affect the private equity industry?
The rapid evolution of greater transparency standards and best practices in governance are definitively changing the ways in which the private equity industry will be judged and managed in the years to come. With the steady evolution of management company IPOs in the private equity industry in North America, private equity firms are subjecting themselves to a higher level of SEC as well as LP scrutiny. This process has a slow but highly visible knock-on effect with other GPs. Achieving GP liquidity for tightly controlled private equity firms will become more common as generational transfers of firms occur. Apollo, KKR and EQT are leaders in the transition process to the public markets. While this has been a painful and volatile road, as any new entrant will testify, it is growing and sets the tone for midsize private equity firms further down the road.
“Improved fund reporting standards and compliance will advance at breakneck speed”
How will reporting duties (tech, process, etc.) evolve with regard to the expected increase in transparency?
Standardised reporting templates and the development of new private equity industry standards are just beginning. Every sovereign investment fund has proactively and defensively developed a customised reporting profile for GPs which meet the unique needs of the institution and its board of directors. What CalPERS requires as a public USA state pension fund differs from any other union pension fund. The college endowment world of LPs has an even more diverse audience which requires the compilation of statistics from a different perspective. Reporting technology will develop algorithmically to take these differences into account and to be able to quickly provide data analytics to the ever-widening LP audience. LPs are aiming for continuously increasing transparency; GPs will be required to quickly customise any data. Artificial intelligence will lead the way with fund administrators quickly adapting to Big Data and speedy servicing. Improved fund reporting standards and compliance will advance at breakneck speed.
What trends do you foresee for LPACs and boards of directors within private equity?
The selection process for the boards of directors of LPACs is rather subjective: GPs choose board members who will be thoughtful and (hopefully) non-combative. Ensuring access to GP allocations and, in particular, to co-investment opportunities is the objective of any responsible LP. Are you invested in the best funds with the best returns? Are you allowed to re-up with high returning GPs? Are you among the first to be able to access good co-investment opportunities? Do you see discounted secondary LP interest when it is available? As private equity funds become more transparent and as publicly traded reporting standards become increasingly common, LPACs will become more broadly independent and will be increasingly able to voice conflicts of interest and to recommend improved governance steps, if these are not initiated or suggested by GPs. Inevitably, more independent directors will join the boards of directors of portfolio companies and GP management companies. The only question lies in the speed at which GPs will adopt such change.