US private capital funds must adapt to meeting new demands for transparency

Outsourcing administration needs for Private Capital funds is less common in the United States’ than in Europe or Asia. The evolving regulatory and legal complexities of Europe, for example, means many asset managers delegate responsibility to specialist service providers.

The US private capital industry might be about to change however in response to growing demands for transparency from mainstream investors who are increasingly turning to their sector to chase the higher returns on offer versus many other asset classes in an ultra-low interest rate world.

Meeting these greater demands will be essential to remain competitive. But there is an issue: private capital funds have always been less transparent than their mainstream asset management peers because of the confidential nature of the deals they conduct.

To assess the extent of these growing demands and how the industry might respond, Intertrust Group and Global Custodian conducted research* among chief financial officers (CFOs) at private capital funds. The results are outlined in a new report entitled The future private capital CFO: Evolving in a digital age.

Portfolio performance and cybersecurity are priorities

CFOs at US private capital funds certainly expect their limited partners (LPs) to require data updates with increasing frequency over the next decade.

Seven out of 10 (70%) of respondents expect their investors to be looking for access to live or daily updates on both portfolio performance and cybersecurity. More than half (56%) of CFOs expect a need for daily or live updates on operational service level agreements (SLAs) and 64% on environmental, social and corporate governance (ESG).

US CFOs anticipate higher priority will be placed on cybersecurity than their peers elsewhere: only 57% of CFOs globally anticipate live or daily updates for these functions respectively.

The performance indicators being sought are more than just updates on net asset values, which only change monthly or even quarterly for many private assets, such as real estate and natural resource infrastructure. Indicators that would make sense include cash positions and KPIs that show how the business is being managed such as daily sales figures or levels of indebtedness. SLAs would also be a key measure here.

With 401(k) plans gaining access to certain types of private capital funds, there will be added pressure – and certainly requirements – to provide more detailed and timely information. We can expect to see added transparency in the structures, fees and performance of the underlying investments, which will translate to more frequent KPI measurements.

The emphasis placed on cybersecurity is also unsurprising. Cybersecurity will always be crucial to CFOs as the level of attacks will continue to increase. The US has many cyber threats, both on companies and the system. It will be important to update clients regularly on how their data will be protected.

US CFOs also anticipate higher priority (64%) will be placed on environmental, social and corporate governance (ESG) updates than CFOs globally, of whom 51% anticipate live or daily update requests.

The US will now return to COP21 under Joe Biden’s presidency and this will impact how the US reports on ESG metrics. ESG is an important part of how investors assess risk around an asset, not least because of the regulatory hazard, but they also want to know their investments meet acceptable standards. This is common in public markets and it is permeating into private capital.

In addition, ESG is becoming an important part of investors’ risk assessment processes. General partners (GPs) will need to continue to report on ESG and diversity and inclusion, which will become ‘must have’ requirements for investors deploying in the private capital assets classes.

Outsourcing will grow

How will CFOs meet these increasing demands for more information? The most popular responses are to invest in technology or increase the size of the in-house finance team, which are both cited by 24%, followed by outsourcing more functionality (21%) and investing in distributed ledger functionality (21%). Just one in 10 (10%) will retain the existing balance between in-house and outsourcing.

Going forwards, private capital funds are highly likely to increasingly outsource as ever more data pressures around reporting to investors and regulators will make data manipulation solutions that meet industrial standards more attractive.

Outsourcing will make even more sense for larger and international funds because of the economies of scale and complexities involved.

But a solution that mutualises the costs among clients and takes on the responsibility of meeting the latest technological and industry standards should appeal to a range of GPs, who can then focus on raising and deploying capital.

Download the report

*Source: Global Custodian in partnership with Intertrust Group; a global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021, including 88 in the US