It is undeniable that reporting requirements for private equity firms have become much more than an accounting exercise. With growing expectations and reporting demands from LPs and increased regulation, private equity funds are not only challenged by underlying fund and asset reporting, but also additional considerations such as ESG and onboarding. 

For mid-market firms, without huge infrastructure and teams of thousands in investor relations, there’s a particular focus and challenge regarding how to react to this trend and how to interact with LPs on this. As a result, some GPs are looking to outsource their reporting needs. 

A roundtable of GPs and intermediaries hosted by Real Deals all agreed that a degree of outsourcing is required to keep up with demand.

“On the LP side there are [reporting] requirements that they have felt is necessary and that includes areas that are sometimes difficult to report on if you don’t have specialised staff,” said one dealmaker. 

Beyond general accounting exercises, it has become increasingly common for private equity houses in the mid to small section of the market to outsource their reporting to specialist providers. 

Outsourcing reporting requirements can be both beneficial for LPs to access fund information when needed and can save GPs time and resources too. 

“On the admin side, there is an increased LP requirement, whether it is information on invested companies or regulatory tax areas. We outsource this, which enables us to put information back to LPs on a common platform to enable them to tick their boxes by going online and not calling us each time,” another GP said.

Standardisation 

The debate regarding standardised versus bespoke reporting is also a key area of consideration among GPs.  

     “You can go two ways, either with the customisation route for each LP or the more standard model. I think there is a balance to be had in meeting requirements. In previous firms, we tried to come up with a common thing that pleases everyone and work to satisfy managers and underlying LPs from there,” an outsourcing provider said. 

“We want to provide data to our LPs that means something and is comparable,” a GP said. The difficulty for small- to mid-market GPs, however, can be having the resources and manpower to provide such a service on a regular, sometimes real-time basis and in a consistent format.

“Larger LPs with bespoke allocation teams may also prefer to use their own templates and be more granular in some areas and more standardised in others,” the GP continued. 

Again, this continued demand can leave GPs in a position where they have to level up and deliver their investors’ requirements in order to keep them on board. 

Whether managers choose to standardise their reporting can also depend on the size of the firm and the number of LPs within their fund.

Discussing the use of real time, digital reporting, one manager said:      “The big difference depends on the number of relationships GPs have with LPs. If there are few LPs not many would want this.” 

Beyond the financials

While parallels can be drawn between financial reporting standards for public and private companies across Europe, the challenge for private firms can be the ancillary reporting, the participants agreed.

“The issue with the ancillary reporting - how deep you go into portfolio companies, ESG, and other, more qualitative areas...is that it is something where there isn’t a standard and there are LPs who are very interested in knowing these granular details and others who are not interested in it. Balance is the key word around how to manage this relationship,” a GP said.  

Increasingly LPs are holding funds to higher standards and looking beyond the financials. It is this information that could ultimately win or lose GPs investments if they are not able to provide this type of reporting.

Managing partnerships

If managers do decide to outsource their reporting, getting the relationship right with their provider is key. 

“Even if you outsource 100% of reporting requirements, you still need to allocate someone in-house to manage that relationship,” one participant said.

While funds must work to co-ordinate relations with their outsourcing provider, however, a balance must be found where funds are not extensively managing the provider. 

“Yes, you have to manage the relationship, but if you’ve got an army of people monitoring what your outsource provider is doing, you’re not outsourcing effectively!” a provider emphasised. 

Where most funds outsource for cost reduction and headcount reduction, among other reasons, the key to smart outsourcing is not to build your inhouse team to monitor what the outsource partners do, it was noted. 

Further to this, it is crucial to use an outsourcing provider that works wholly in cohesion with managers, the participants agreed. 

“Take time diligencing outsourcing providers and put more pressure on these firms to showcase the advantages and services they have,” a provider said. 

Ultimately if firms opt to partner with an outsourcing provider, they must become an extension of the firm and work to ensure that their goals are aligned. 

“You’re effectively an extension of the manager at that point [once selected to operate as an outsourcing partner], as the underlying LPs are investing with that manager and their investment trust, so we work very closely with managers throughout the process. From when the fund is constructed all the way through to when it is up and live. That interaction and constant dialogue is key,” the provider continued. 

“Generally we would work very closely with lawyers either in-house or external, LPs and managers. It’s like a closed loop, everyone has to be part of the circle to get it up and running and be successful.”