Transparency demands impose clear requirements on alternative funds

By Roger Woolman Chief Revenue Officer
June 9th 2022

Diversification. Augmented returns. Inflation hedging. Yield enhancements.

Expanding allocations to alternative investments such as hedge funds, private equity, private debt and real assets can temper investors’ portfolio risk and provide new sources of performance. But one serious complaint has long been levelled at the alternatives sector: a lack of transparency.

That looks set to change.

Private funds under SEC transparency spotlight

The US Securities and Exchange Commission is on a mission to increase transparency, competition and efficiency in the private funds arena. In February, the agency proposed new rules and amendments under the Investment Advisers Act of 1940 aimed at enhancing the regulation of private fund advisers to protect investors.

According to the SEC: “The proposed rules would increase transparency by requiring registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance.”

The proposals would also prohibit advisers from charging various fees and expenses to a private fund or its portfolio investments, and create new requirements related to fund audits, books and records. Private funds will need to undergo a financial statement audit at least annually and upon liquidation, with the audited statements distributed to investors promptly after completion.

“These audits would provide an important check on the adviser’s valuation of private fund assets, which often serve as the basis for the calculation of the adviser’s fees,” it noted.

The SEC reopened its public comment period on the proposed rules in May to give the public additional time to comment on an issue that the SEC said has drawn significant interest from a wide range of investors, issuers, market participants and other stakeholders.

The SEC focus comes as BlackRock claimed it is seeking to provide “absolute transparency” on private market fees, amid a UK government push to incite pension plans and other large asset allocators to invest in unlisted UK assets. Greater fee transparency and improved disclosures will help institutional investors better understand what they are paying and the results they get in return.

Transparency is an end-to-end process

Improving transparency and investor servicing is not just about generating some quarterly reports though. Delivering true, accurate, scalable transparency demands automated, streamlined processes at every stage of the fund and investment cycle.

Investors need to be properly registered and their records maintained. Commitments have to be set up and monitored at each stage of the fund lifecycle, with tracking of all drawdowns, distributions, transfers and switches.

Accurate valuations and investor reporting depend on allocating income and expenses appropriately. An ability to support even and uneven allocations is required for different types of fund structures.

Fee calculations are at the core of investor servicing. Yet the array of performance fees, management and transaction fees, trail commissions, taxation calculations, clawbacks, hurdles and waterfalls can be highly complex and customised across investors. For private equity funds, waterfall and fee calculations need to be produced on both a whole fund and deal-by-deal basis, with close rebalancing and equalisation.

Handling the fee calculations offline – a common recourse for industry participants – introduces significant risk to the valuation process. Systematic control is instead essential to ensure valuations are fast, accurate and consistent.

Powerful data analytics are needed to generate desired performance metrics such as internal rate of return, time-weighted rate of return and total value to paid-in capital.

Performance, fee and valuation figures then need to be reported to investors to provide the transparency they – and regulators – seek.

In many cases, the only way to meet client demand for customised reports is to resort to manually-intensive, offline processing. That compromises the accuracy and consistency of what is delivered to end-users. The answer lies in an automated reporting capability that can meet investors’ expectations for detailed, tailored reports, while ensuring full control over the report creation and release of data.

Providing investors with on-demand access to reports, along with interactive dashboards and 360⁰ views of limited partner accounts through an easy-to-use digital portal further aids transparency.

Clear progress

Whatever regulatory rules take shape, the direction of travel for the alternatives industry is clearly towards greater transparency. Now is the time for firms to get out ahead of it.

ABOUT DEEP POOL

Deep Pool is the #1 investor servicing and compliance solutions supplier, providing cutting-edge software and consulting services to the world’s leading fund administrators and asset managers. Our flexible solution suite, developed by an experienced team of accountants, business analysts and software engineers, supports offshore and onshore hedge funds, partnerships, private equity vehicles, retail funds and regulated financial firms. Deep Pool is a global organisation with offices in Dublin, Ireland, the United States, the Cayman Islands and Slovakia. For more information, visit: www.deep-pool.com.

Roger Woolman
Roger has over 25 years of experience as a finance & technology exec. He co-founded Deep Pool/HWM Group in 2006 & rejoined in 2021 following his role as Director of Funds & Alternatives at SS&C Advent where he oversaw business development activities for their international fund management business.