Investors are seeking more transparency into their alternative investments, but friction remains between investors and managers. In a recent white paper, Northern Trust outlines four areas where a more constructive dialogue between the buy and sell sides could help everyone strike a better balance.
Regulation
Much regulation continues to focus on transparency and disclosure. Collaboration and consensus between managers and investors before engaging regulators could in some cases better serve the interests of all parties, including the regulators. Potential areas of common ground include:
• Working together to identify areas of regulatory conflict/overlap prior to implementation.
• Aligning new regulatory requirements with regulations from other jurisdictions or domiciles
• Consolidated feedback to regulators on implementation timelines
Pooling industry resources to address new or proposed regulations could help mitigate unintended difficulty and make a stronger case for change in areas where both sides agree.
Use of Credit
While credit can offer meaningful benefits for both managers and investors, certain complex credit arrangements can have unforeseen consequences for investors, such as tax implications, liquidity issues, and accounting challenges.
When managers are transparent about how they are using credit, investors feel more confident in their understanding of the risks and anxiety levels can decrease. So by talking candidly about how they plan to use credit and the benefits it will offer, managers can offer clarity that helps all parties know what to expect.
Fees
Alternative fee structures are complex and one of the most sensitive issues between managers and investors. Collaborative, honest dialogue where managers seek to educate investors and investors are honest about their concerns could do much to resolve some of the most complex issues, such as:
• Standardizing disclosures for offsets in private equity, real estate, and infrastructure funds to offer more transparency to investors while mitigating operational burdens on managers
• Discussions about how the manager calculates returns – particularly around the treatment of fee and capital call credit use – to alleviate confusion around gross vs. net fees.
• Collaborative efforts to clarify and educate beneficiaries and others about carried interest.
• Open discussions around expense discussions and the balance between short‐term cost savings vs. long‐term value.
Operations
Due diligence is a non‐negotiable requirement among most investors in hedge funds and has been for decades. But this has been less true of other alternative strategies, where firms have been less comfortable with due diligence, partly due to the opportunity for misunderstanding.
The fact remains that operational due diligence is the new normal. Investors and regulators increasingly expect controls. Managers will be better served by educating investors about their controls than they will by avoiding the conversation. Managers who embrace investor due diligence stand to benefit from “right sizing” their control framework in collaboration with investors.
Dialogue is not a cure‐all; differences of opinion and needs will always exist. But reframing the conversation between managers and investors has the potential to improve industry‐wide transparency practices.
To read Northern Trust’s full paper, visit: https://www.northerntrust.com/ntlanding/cis/transparency?cmpid=superview-content-promo-html-060118
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