Can you predict how good your returns will be by looking at the state of your back office?
Unlikely as it may sound, investors could justifiably use the quality and depth of your investor reporting as an indicator of how much money you are going to make for them.
According to a study by PE software supplier eFront, higher performing funds are more likely to conform to standardized reporting template requests.
Says the firm: “Better performing GPs submit standardized reporting templates in addition to proprietary quarterly reports relatively more often, possibly because they are happier to provide granular detail on their financial performance and may also be eager to allow LPs to compare their performance with their peers. As we move from the low to high performing funds, the funds become more likely to comply and the difference in the information quality and quantity increases.”
“Compliance” here, refers to submitting information via a template as requested by the LP. The study states that the average IRR of GPs that don’t comply with template requests is 10.2 percent lower than of those that do.
No one is suggesting a causal link between the two things, but it is not rocket science to suggest that a better manager would be more inclined not only to strive for high standards of professionalism across the whole firm’s operations, but also be happy to share plenty of “good news” data with LPs.
In other words, those with nothing to hide have nothing to fear from their investors’ scrutiny.
This is why CFOs are now playing a more important role in the fundraising process.
According to a survey we conducted with fund administrator Sanne Group, the vast majority (96 percent) of CFOs say they get called on to meet investors at least some of the time during fundraising. More than one in 10 is asked to meet LPs every time.
It falls to the CFO to ensure performance data are available and accurate, and to get investors comfortable with the firm’s reporting and operations. These are critical issues to raising capital. If investors start to associate good reporting with good investing – and why wouldn’t they – the CFOs role will become ever more important.