August 26, 2013
Interviewed by: David Snow
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Reducing the Pain in PE Reporting

Can LP reporting be standardized and automated? It can, according to AltExchange, the industry alliance that has introduced an automated, standardized, mechanism for sharing LP reports and data. Karen Lagerlund of HarbourVest Partners and Chris Ward talk with Privcap about the system, arguing it will end the painful process of importing vast quanities of GP data into investors’ own data systems – and could even spell the end of ad-hoc LP reports.

Can LP reporting be standardized and automated? It can, according to AltExchange, the industry alliance that has introduced an automated, standardized, mechanism for sharing LP reports and data. Karen Lagerlund of HarbourVest Partners and Chris Ward talk with Privcap about the system, arguing it will end the painful process of importing vast quanities of GP data into investors’ own data systems – and could even spell the end of ad-hoc LP reports.

The End of ad-hoc LP Reporting?

A Privcap Conversation with Karin Lagerlund of HarbourVest Partners and Chris Ward of AltExchange

David Snow, Privcap:

Today we are joined by Chris Ward of AltExchange and Karin Lagerlund from Harbourvest Partners. Welcome to both of you, thanks for being on Privcap today.

Chris Ward, AltExchange:

Thanks.

Karin Lagerlund, HarbourVest Partners:

Thank you.

Snow:

So we are talking about an effort that both are you involved in, to find a common standard for the sharing of information in private equity. It sounds like a big effort, we’re gonna hear about the challenges of doing so. Maybe we could set the stage a bit and learn about what the private equity world is like by way of information standards, how reports go out the, the format for information, and the challenges that LPs and GPs have in just kind of communicating with each other. Karin as the CFO of a very large investment advisory firm, can you talk about what that landscape looks like and the challenges of sharing information?

Lagerlund:

Okay well at HarbourVest we have over 300 institutional clients that are located around the globe, and over the years as we’ve grown we’ve added funds and we’ve added clients. Over the years as we’ve gone through different economic cycles and business cycles there has been an increasing and a waning demand for different levels of detail. I always equate it to when things get bad people want to know more and we’re much busier on the reporting side. And then when things get good they kind of back off. I think what we saw in the last economic downturn was a combination of both, some scandals combined with a downturn, which caused some permanent change in regulatory and audit scrutiny, which has required a lot more details to have to permanently be handed over to multiple clients. And also as the institutionalization of the asset class has grown over time there is much more, an increasing number of parties that want the data. And then it becomes an operational challenge of I need more resources to be able to complete all these requests, do I want to say yes? Yes I want to be client friendly, but I’m not gonna say yes to you know, 100 spreadsheets are this big that every day that’s all we’re filling out.

Snow:

Maybe Chris you can jump in on this, but what are some examples of kinds of information, data requests where it’s the way it is transmitted or reported could vary wildly across different managers?

Ward:

Yeah I mean I think a perfect example would be quarterly financial statements. Today you receive the quarterly financials in, they’re gonna be in hard copy, PDF, you’re going to have a format from one manager to the next. You’re going to have, probably, three very consistent quarter of the template what that looks like, and then one where the, the Q4 that might be different. So from a Harbourvest perspective the, the work that is entailed to get that data into a system, into a database and then they can actually analyze it is very, very, very painful.

Snow:

Is it as painful as Chris describes where you might get a report in from someone in PDF and therefore someone on your team or maybe on an outsourced team has to go through and enter it into a separate database?

Lagerlund:

That’s primarily how it’s done now, so we have over 70 analysts and accountants on our team that, basically, that’s what they’re doing. Inputting data into systems. Some of it is reconciling the data and checking it, but a lot of it is the manual inputting of data into our database, so that we can summarize it.

Snow:

So both of you are involved in a relatively new organization called AltExchange. What is it? Why was it brought into being, and how will we know if it is successful?

Ward:

AltExchange is an industry alliance that was established, really started say late last fall with a working group. And then we sort of, we announced this in May, and what the alliance is it’s a, a group of both GPs, LPs and advisors who are looking at standardizing the mechanism, the way in which information is shared. So one thing to, to be, to clarify is what it isn’t, what AltExchange is not. It’s not a, a data warehousing endeavor. It’s not, we don’t store any data. The other thing, it’s not a transparency play, this is not about trying to push the general partners to, to provide more information to the LPs. We support ILPA, we support IPEV, it’s essentially, it’s not a very sort of sexy offering, but it’s something that’s very, very needed in the industry. It’s the ability to put data into buckets, and then agree to what level information gets passed and do that in an automated and standardized way.

The other thing that’s important to know is AltExchange is managed by a board of directors. That board represents the industry, GPs, LPs and advisors. It’s not an LP focused alliance, and the intention is that the board will continue to push the alliance in a direction that benefits all parties. So if it turns out that the AltExchange requirement produces more work for a GP, then it’s not successful. The, it has to be beneficial for both parties. If you, if the LPs continue to ask for more information outside of the AltExchange data then the GPs see this as a, just an additional work that they’re gonna have to provide. So the agreement is that the LPs agree that if you get information via AltExchange you’re not gonna be asking for all those extra ad hoc reports. And the GP provide level one data within twelve months from the agreement being finalized.

Snow:

Karin, how do you think this will, the adoption of AltExchange will change or streamline the way that your firm operates?

Lagerlund:

Well like Chris said it’s gonna have to be broadly accepted, otherwise it’s just another spreadsheet or another process that I have to do. The benefit is that it’s a process that I’ll automate. So it won’t necessarily be a spreadsheet that I have to populate. So that will be beneficial. If LPs adopt it and I’m only having to report in the electronic fashion through AltExchange, then that will make our process much more streamlined. You know, we still will have our standard reporting that we do and all of the things that we would normally publish and produce, or access that we would give to our clients on our systems will still exist. It will just be the data points that they want to collect will, I call it the seamless pipeline, will flow more seamlessly from the, you know, GP entities all the way to the LPs.

Ward:

Yeah, and to sort of promote adoption the, the AltExchange platform is, it’s an XML standard, so it’s an open protocol. And the standard will be open and the, the system that the users, the, decide to utilize is open. So they can use whatever backend system using and so that’s an open source as well. So the intention is to make the technology easy to integrate. We have also created Excel plug-ins, if you’re using Excel you want to produce the XML format, of if you want to integrate a script into your, your backend system you know, the intention is to make this something that is you know, adopted from that perspective.keep

Snow:

Well how is adoption coming along so far, you have your, you have your founding members obviously?

Ward:

Yeah, we have founding members, we’re up to about 30 member now. And we have a lot of people looking at this right now, and, and they’re doing their due diligence and rightly so. We see a sort of another wave of adoption, and what we’ve actually done is we have a, a fairly sizeable number of managers in our current membership. Everybody says that we agree this is something that has to be done, it’s overdue, and it’s just a matter of just walking through sort of the mechanics. What is it? What is it not? You know, how does it work? How do I implement it? You know, and then it’s a priority where does it fall into their, into their workflow.

Lagerlund:

I think one of the things that will make this effort successful is the, the combination the Chris describe of, there has been LPs participating, and GPs participating, and a technology firm participating, so you’ve kind of got the three necessary parties, whereas other efforts might only have one of those parties. And there hasn’t been that global sort of solution or you know, end result, or complete adoption of something.keep

Ward:

And I think our message is very truthful , is that we want people to participate and direct where this goes. We’re helping sort of shepherd this process, and the more people that get involved and participate, and have direction and guide the standards and the industry, then I think that we’ll see boarder adoption because then they, it’s not another potential you know, a one sided initiative. And that’s the vision that we have, you know, we have very, very constructive discussions from both sides of the equation, or all sides of the equation. The other thing is that you don’t have, there is no requirement to adopt the entire model. So if you just want to implement let’s just say for example cash flow information and schedule investments day one that’s okay. So you know, it’s not an all or nothing proposition, and it’s not an all or nothing proposition as far as the leveling of the data that you’re, you’re gonna consume.

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