By Simon Clark
Allianz SE, one of the world's largest investors, wants
private-equity firms to standardize how they report performance and
fees, throwing its weight behind efforts to improve transparency
and reduce the risk of fraud in the fast-growing $4.1 trillion
industry.
The German insurance company's Allianz Capital Partners unit,
which manages more than EUR32 billion ($35.8 billion) in
private-equity investments, has joined a new coalition that is
pushing to create common standards for reporting.
Daniel Gregor, a director at Allianz Capital Partners, said the
goal of the program, known as the Adopting Data Standards
Initiative, is to get private-equity firms to adopt a standard way
of telling investors how their funds are performing. "It's a joint
process," he said in an interview.
Investors complain that different private-equity firms report
fees, returns and asset values in different ways, so it is
difficult to make direct comparisons. Firms use different terms and
metrics to report on their performance, with some breaking out fees
and expenses investors have paid while others make such information
harder to identify.
To make matters more complicated, firms are increasingly using
bridge loans, known as subscription lines, to pay for assets and
boost returns, adding more debt to already leveraged transactions
without always accounting for the effect on returns, investors
say.
Increased scrutiny from politicians is adding momentum to the
push to standardize private-equity reporting. In Congress,
Democratic senator and presidential candidate Elizabeth Warren has
proposed a broad overhaul in regulation of the private-equity
industry, including standardized disclosure.
In Pennsylvania, state politicians are working on legislation
requiring better disclosure from private equity to the Pennsylvania
Public School Employees' Retirement System and the Pennsylvania
State Employees' Retirement System, which jointly manage about $90
billion.
"Standardization would help prevent inflated or overstated
successes through metrics that are known to be easily manipulated,"
said Pennsylvania State Treasurer Joe Torsella.
"The industry thrives on a little bit of opaqueness but it isn't
defensible when it's criticized, and now there is a lot of
criticism," said Lorelei Graye, who is the founder of the
initiative Allianz is supporting. She said she has backers
collectively managing hundreds of billions of dollars and is
rounding up more investors.
Agreement on standards has become more important because the
industry has boomed in size and complexity, according to a report
from Citco Group, a fund administrator overseeing $1 trillion.
Private markets including the $4.1 trillion in private equity have
soared ninefold since 2000 to $6.73 trillion, growing three times
as fast as global public equities. Private markets also include
private investments in property, infrastructure, debt and natural
resources, according to Preqin data.
Disagreement about common reporting has festered for years. Many
private-equity firms guard information, and currently it is easier
for them to push back against investors because strong demand for
their funds gives them the upper hand in negotiations, Oxford
University finance professor Tim Jenkinson said.
The Institutional Limited Partners Association, which represents
investors with more than $2 trillion in private equity, created a
template for reporting fees and expenses in 2016, but not all firms
use it.
A coalition aimed at agreeing on standards called the
AltExchange Alliance folded in 2018 after gaining support from
private-equity giants including KKR & Co.
Some firms were reluctant to join AltExchange because they
thought it was gathering information for one of its founders,
software company eFront, according to people familiar with the
situation. An eFront spokesman said AltExchange wasn't a source of
revenue and the firm was never able to access data for its own
purposes. U.S. asset manager BlackRock Inc. bought eFront last year
for $1.3 billion to expand into private markets.
A spokeswoman for the American Investment Council, which
represents U.S. private-equity firms, said it is skeptical that
standards can be agreed upon, blaming investors who request
information based on their own formulas. A spokeswoman for KKR, an
American Investment Council member, said it supports all efforts to
promote standardization.
While reporting standards have improved since the 2008 financial
crisis, there is a long way to go, Mr. Torsella said. The
Securities and Exchange Commission has fined firms for disclosure
failures.
Private-equity firms raise 10-year funds and typically charge a
2% annual fee and keep 20% of profits. They can also charge other
fees.
Firms have some leeway on how to value assets that they can hold
for years. An extreme example of differences in reporting
valuations was revealed in a court document for Abraaj Group, which
the U.S. Department of Justice has accused of fraud. Six executives
were indicted last year and one has pleaded guilty. Abraaj valued
one investment at 1.4 times cost but U.S. private-equity firm TPG
valued the same company at half of that, according to the document
and people familiar with the situation.
It may take another financial crash or scandal to focus minds on
standardization, according to information technology expert Richard
Change.
"It's tough to build the political will," he said. "Typically,
out of a crisis come these moments."
Write to Simon Clark at simon.clark@wsj.com
(END) Dow Jones Newswires
January 07, 2020 10:24 ET (15:24 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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