Asset managers with deeper access to information negotiate more favorable deals in private markets and ultimately deliver higher returns. But new research finds that this information advantage also applies to investors in private funds.
Private equity, real estate, infrastructure, and other alternative investment funds that provide the most transparency to their investors — or limited partners — are also the best performing, according to a new study released today by software provider eFront on the reporting practices of 1,800 funds that invest in private markets.
Limited partners in private equity and other alternative investment funds have long been pressing for more transparency from their asset managers. The new research shows that getting comprehensive data is not just a nice-to-have feature, but is linked to better returns.
The study also found that the bigger the investor, the better the information they receive. Alternative investment managers are most willing to give comprehensive data to the largest limited partners, which have the most clout, eFront concluded.
Tarek Chouman, chief executive of eFront, said in the report that the fact that such information asymmetry exists not just between fund managers but between investors in the same funds “underlines the continuing need for LPs to be informed and strategic in their allocations and interactions with fund managers,” adding, “small to mid-sized LPs can benefit in terms of the quantity of information received from joining the larger LPs when requesting the data in the same format.”
[II Deep Dive: Private Equity Firms Adopt Fee-Reporting Template as Investors Demand Transparency]
General partners that provide standard reporting templates — which eFront says provide highly detailed and granular data — have internal rates of return that are 10.2 percent higher than their peers, according to the study. A reporting template includes information on the asset manager, such as the number of investment professionals and exposure to geographies and sectors, as well as a detailed breakdown of both fees and portfolio companies, according to eFront, which makes such templates for fund managers.
LPs can use the data from these templates to do their own analysis of asset values and performance attribution. Funds that use standardized templates provide 70 percent more information than the average fund, eFront claims.
For LPs with $30 billion on average, general partners provide them with all the information they requested 70 percent of the time, including template reports. In addition, fund managers with the most LPs provide the most information to each one. For every additional LP, a fund provides 5 percent more information.
Funds larger than $10 billion are almost 25 percent more likely to provide standardized templates than funds with less than $1 billion in assets, the firm found.
North American funds are 34 percent more likely to provide a standardized template than European funds, according to the report. In addition, more than one quarter of general partners are inconsistent in the way they report to LPs.
