It goes without saying that the releases of the EVCA Reporting Guidelines (2000) and the revised Valuation Guidelines (2001) were an important and valuable stepping stone for the European private equity industry and also for the world’s private equity markets. This is an opinion shared by an investors, investment advisers and private equity fund managers alike.
A higher level of meaningful comparability, greater consistency and more transparency of fund valuation, presentation and reporting private equity returns are the expected improvements. Both prospective and existing investors in this asset class will benefit from the European standards by having a greater degree of confidence in the performance numbers presented by the industry as a whole, coupled with the results presented by each of the private equity funds once they comply with the guidelines.
Despite recent improvements, the perceived difficulties in selecting private equity funds and understanding, following, accounting and measuring performance of investments in private equity funds have been and still are a deterrent to many investors. “They are all claiming to be top quartile”, is one of the frequently heard statements when we talk to fund managers marketing their products. They also frequently ask how reliable the (quarterly) valuations are, especially when they notice that the same investment in a company is valued differently by private equity fund managers investing in that deal at the same time. How far can we trust the return figures presented by the funds or presented by the industry associations?
Again we note the desire and need for a great deal more clarity and transparency in the global private equity industry.
The EVCA valuation and reporting guidelines at least should help assure or reassure that the performance information is complete, consistent and fairly presented. This is aimed at those pension funds boards and their trustees who a) are already private equity exposed or remove the constraints for those who b) still may have some doubt and show scepticism to enter the market or c) those who, so far, may be reluctant to invest in private equity at all.
However, this does not mean that the private equity assets class has reached its ultimate goal to be considered as: ‘the minimum unified standard for fundamental ethical presentation of investment performance based on the principles of fair presentation and full disclosure of a fund manager’s performance history’. As long as fund managers have to comply with a multiple set of standards, the lack of commonality is hampering the basic need for the whole industry to establish one global set that represents best practices.
It is the important goal of standardisation that has led to the initiative from the AIMR Investment Performance Council (IPC). Members of the Venture Capital and Private Equity Subcommittee are currently endeavouring to establish a set of global standards for the international private equity industry.
As private equity becomes a more open and accessible industry, the creation of a common framework will serve as the ‘confidence bridge’ between the GP’s of private equity funds and the institutional investors as LP’s in those partnerships. This is at a stage when it is commonly understood that there is still some way to go. To expedite the formation and usage of that “global bridge”, investing institutions will play a prominent supporting role in advocating and calling this industry to come up with a harmonised valuation and fund performance reporting format. Acting as the group of representatives that insists on their private equity managers to be in compliance with the valuation and reporting guidelines in force would be a good initial move.
The creation of a set of homogeneous guidelines is not utopia but of paramount importance for this still relatively young industry to reach the highest degree of confidence among all its practitioners in the field. It should be the result of trust, strong belief and leading thought through the input and strong support of parties involved (industry associations, fund managers, investors, entrepreneurs, verifiers, investment advisors, performance benchmark suppliers, regulatory bodies).
Another important step in the right direction is to recognise the fact that the insight in the individual fund performance data and calculation methodologies needs improvement. At the moment, portfolio managers at institutional level are still faced with a dilema: when fulfilling their fiduciary role towards their own boards and trustees, they have an information gap to close when professionally judging the private equity fund performance data or how it has been calculated. This is at the stage when these institutions still are a) in the strategic process of contemplating whether to enter the private equity market for the first time, or b) expanding, monitoring and assessing the quality of their private equity programs.
Currently, they do not have at their disposal the appropriate, timely and more frequent public disclosure and ranking of the full comprehensive set of the true state of the individual fund performance data over different time horizons. This complicates the analysis when classifying fund managers’ performance at a specific moment in time or across time when taking a closer look at the consistency of performance.
The lack of transparency out of the industry itself, when communicating the individual historical performance track record, still creates a hurdle for a lot of newcomers or those already actively participating, when interpreting and comparing performance results. Having access to the data on the peer universe of private equity funds – the benchmarking approach, for instance – would, for the institutional investor, allow for a better analysis of the effects of manager selection and strategy allocation.
Of course the long-term nature of this business should persevere. The outcome that short-term performance measurement and benchmarking the results may lead to the undesirable actions of investors making wrong or hasty investment decisions based on, for instance, too shortly oriented (eg quarterly) reported performance statistics, is unlikely. This would be counterproductive for the industry as a whole. Private equity capital is patience capital that should reward itself over a long duration and should be judged on reliable and relevant longer-term performance information.
When the mutual aim of globalisation of guidelines and disclosure of individual fund performance data and calculation methodology can be accomplished, it will provide a good service for institutional investors and the industry in general. This may well take time, but in the long run it will be worthwhile pooling all our efforts for these improvements.
Ad van den Ouweland is managing partner at Robeco Private Equity in Rotterdam

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