March 20, 2016
Interviewed by: Privcap
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Why PE Needs Data Standards

Private equity firms are facing operational challenges in light of recent press scrutinizing fees and transparency. Karin Lagerlund of HarbourVest Partners discusses the importance of reporting data to investors, how to improve the industry’s data standards, and the efforts being made by GPs to enact regulation in the U.S.

Private equity firms are facing operational challenges in light of recent press scrutinizing fees and transparency. Karin Lagerlund of HarbourVest Partners discusses the importance of reporting data to investors, how to improve the industry’s data standards, and the efforts being made by GPs to enact regulation in the U.S.

Why PE Needs Data Standards
With Karin Lagerlund of HarbourVest Partners

Q1: What are the current operational challenges in private equity?

Karin Lagerlund, HarbourVest Partners: For a lot of the events during the last year (2015), the articles and the headlines in the press about fees and do we know what all the fees are really brought light to different fees and costs associated with doing private equity. I think it’s important for our investors to be able to know the total cost of their private equity investments.

Just reducing the overall cost of gathering that data is a topic for firms like HarbourVest as well as the other general partners, to be able to gather the right amount of data and report it to your limited partners, we need to improve the way we transmit the data—not just what we’re collecting. Some of the fees that people want to collect aren’t things that automatically flow through our current systems. So, these things require system changes and report changes and all of that takes a lot of time and effort to get to the point where we’re able to easily transmit the right information to our investors and clients.

Q2: What will an improvement in data standards allow the industry to do?

Lagerlund: If the industry really wants to grow up and be an institutional asset class and attract additional investor classes, maybe the 401(k) plans are individuals to a larger degree. We’re going to need to have good data and, to have good data, you need to have data standards so that we all agree on what the data points are. There’s one set of definitions and we’re all using those same standards. I also think it needs to be transmitted in an easy format to transmit. So, consistency and then ability to transmit that data amongst ourselves needs improvement.

Q3:  How important is it to streamline reporting and transmission of data?

Lagerlund: It’s important for us to be able to know what the complete cost of an investment is, as you would look at your mutual-fund statement when you’re doing your 401(k) allocations. Some people like to pick an indexed fund because it’s the lowest cost. Some people like a higher return, are willing to pay a little more and will pick a fund that has a higher expense ratio. But I think we need consistent expense ratios so that we can compare them. Other countries have regulated this. It’s important as an industry that we maybe try to get ahead of that, being required to do something and self-regulate and be able to give a good, comparable expense ratio for each one of the funds that people are investing in.

Q4: What are the roadblocks for GPs in the U.S. to enact regulations?

Lagerlund: We’ve been making a little bit of progress with some of the efforts out there. You’ve got ILPA, or the Institutional Limited Partnership Association, coming up with templates and adding to those templates and revising them. They’ve had a recent fee-transparency initiative where they’ve expanded their current template to include more of those fees we’re talking about.

We need to get to a spot where we’re able to actually implement and the industry as a whole picks it up and adopts it. That requires maybe a little more head-to-head negotiation with the GPs and the LPs than we’ve had to date. Another thing I’ve worked on this past year or couple of years is the Alt Exchange Effort, where we’ve had GPs, LPs and service providers all in a room together, where we really negotiated what term—what we would call something—but then what term I wanted versus what term a GP was willing to give and how easy it was to provide. And we segregated the data into required mandatory-type fields and then optional.

Where we need to get to as an industry is something that’s adoptable by GPs so that we can have one standard. I think there are a lot of GPs that would love to have one standard.

It’s an important topic and it would improve the efficiency within the industry, which I think is really important for firms to keep their operational costs down as well.

Q5: How do you approach client services organizationally at HarbourVest?

Lagerlund: I have over 70 people reporting to me and over half the firm is operations, so we’ve very much tried to operate with ourselves having a good client-service mindset. We will almost provide a client with any data point or any format they want. Then, we try to balance our relationships with the general partners and say, “OK, we’ll take whatever you give us.” We’ll hand-key it in to our system so that we can get it out to our clients. I think we’re seeing the pressure of just continuing to add to that process, rather than have the one standard that would make the transmission that much easier.

Q6: What are the biggest challenges in setting up the right control environment in operational due diligence?

Lagerlund: Some people might try to run a lean operational group and that may cause trouble down the road. They should really focus on whether they have the right people, the right number of people in place and the right controls in place.

The more standard controls people have in place, [the more it] will ease some of the burden. People will have maybe a standard response that they might give out to questions and that’s helpful. That’s another area where that could be streamlined a bit with key controls that people have in place. We do a SAS 70 report every year, which describes our processes over all of our functions that happen at HarbourVest. It identifies key controls and then, the audit firm comes in and does a report on how each of those controls has been complied with during the year. We issue that report on an annual basis.

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