Neil Harris explains why INREV’s Standard Data Delivery Sheet should become the de-facto standard for European investors
Prior to the global financial crisis, reporting by many (but not all) managers consisted of little more than financial statements, photographs of shiny buildings and, if you were lucky, a few charts and portfolio stats emphasising how good the fund performance was. On the whole, investors didn’t complain too much, blinded as they were by mouthwatering IRRs (unfortunately, as it turned out, largely unrealised).
When the crisis hit, the industry scrambled to understand its scale and likely impact, and risk teams were suddenly asking searching questions. The sector struggled to provide the answers. Many investors have moved quickly to put in place more robust management information systems to facilitate much more detailed performance benchmarking and risk-monitoring capabilities. These systems are data-hungry and need to be fed.
Quarterly reporting by fund managers has improved materially in the last five years in response to demands from investors. However, managers have also been inundated with requests from limited partners for data in a multitude of forms to meet the needs of investors’ front and back offices.
Both groups turned to INREV for support and guidance, and the SDDS project came into being.
INREV acted swiftly. In October 2010, the SDDS working group was established with a mix of LPs and GPs reflecting the broad membership of INREV and existing industry data sheets were reviewed. In 2011, the SDDS format was agreed, definitions reviewed, and a draft prepared. Detailed stakeholder discussions led to the publication of a white paper in April 2012, after which feedback was obtained from the industry and international stakeholders, and the final iteration of the SDDS was launched in October.
The working group was very clear; the purpose of what became known as the Standard Data Delivery Sheet was to standardise the delivery of essential quantitative data by fund managers to LPs in a single data sheet. The SDDS may not meet the needs of all investors, but it should the majority. It may not be 100% appropriate to all funds, but it will to the majority. Some data will be more appropriate to core than opportunity or more applicable to closed-ended than open-ended funds. Some data is more for the front office than the back, some investors may not need all the data, and some may want more. Some will import the data into their system, others will not.
But the SDDS caters for the needs of the majority of institutional investors no matter their nationality, and delivers what they want to receive from fund managers on a quarterly basis. It is in a format that will allow users to easily write to or upload the data into their own systems. Taking account of different accounting standards, and reflecting the INREV Guidelines (for example, INREV NAV) the SDDS is applicable to all fund styles, structures and strategies.
INREV is clear that the SDDS needs to be frozen for a certain minimum period so that investors and managers avoid having to change their systems frequently to map to a new sheet.
The SDDS is not a replacement for general quarterly reporting, but will complement it. In most cases, it doesn’t contain any more information than managers are (or should be) providing. Where fund managers and their investors choose to adopt it, the SDDS will reduce the number of separate reporting formats that managers have to produce.
It’s important to emphasise that the SDDS is not being imposed by INREV on investors and managers. It’s for investors and fund managers to discuss and agree on whether and how they use it – and when.
You won’t get all investors changing their systems overnight but, as the SDDS gains traction, investors will increasingly design or adapt their systems around it. And it’s to be expected that managers will try to resist providing alternative data requests where they provide the same data in the form of the SDDS. When it does become generally incorporated into reporting procedures, everyone wins. Investors will have the data they require and fund managers will have a standard format that, in time, will make their lives more straightforward.
Despite the significant level of support received to date, it will take time before the SDDS attracts widespread use. INREV’s due diligence questionnaire was introduced in 2007 but took a good two or three years to be fully implemented. Now it is an industry standard. We need the large investors to put their shoulders behind the SDDS initiative.
I believe that it is in the industry’s interest for the SDDS to become the de-facto standard for European investors in Europe – and for European investors investing globally. ANREV has already implemented the INREV Guidelines and the SDDS will be incorporated within the revised guidelines that are currently under review, so it is (I hope) a reasonable assumption that the SDDS will gain some traction in Asia.
The US is a well-established market with its own practices and standards. Despite the participation of PREA, REIS and NCREIF in the consultation process, it may be too much to hope for that the SDDS is adopted in its current form. But I suspect a standard will be developed in the US by one or other of these groups and will have strong similarities to the INREV SDDS.
Our perspective at GIC reflects these challenges. Our proprietary data sheet is slightly different from the one that INREV has developed. So in the US and Asia we will use our own, whereas in Europe we have built in the flexibility to receive data via the SDDS where managers have accepted the SDDS as a default reporting format.
There’s been a lot of discussion about investors turning their back on funds as a result of the crisis and seeking more direct forms of investment – JVs, club funds, etc. I believe the pendulum will swing back in favour of funds, as investors realise over time how difficult direct investing can be in unfamiliar markets.
The main problem with funds was, of course, with performance, but also a sense of lack of control and transparency which left investors feeling impotent as they watched returns collapsing, not having the data to understand the risks. I think the SDDS will play a part in making funds more transparent, more investor friendly, more of a partnership.
The potential big game-changer, though, and the most exciting aspect of the SDDS, is the opportunity for INREV to create new benchmarks by capturing the fund level SDDS data for the INREV fund universe. What would be transformational for the fund industry would be the capability to benchmark fund performance to this level of granularity – vacancy levels, distribution yields, etc – across the entire INREV fund universe. This must help make fund investing more attractive from an investor viewpoint and allow the funds themselves to articulate their relative performance more easily – surely a win-win.