Let’s K.I.S.S. … Keep It Simple!
Author: Jaime Hildreth
A few weeks ago I attended the PEI CFO / COO Conference in NYC and participated in a panel that examined “An inside view of limited partner expectations, terms and negotiations.”
The panel was moderated by Tania Taylor, Partner of Deloitte & Touche LLP and also included Michael Elio, Partner of Stepstone Group, William Janetschek, Chief Financial Officer of KKR, and Kristine O’Connor, Managing Director and Chief Financial Officer of Franklin Park.
We discussed a broad range of topics, including the most current terms that are being negotiated during a fundraise, what tangibles LPs are asking for from their GPs, LP expectations on GP organizational stability and what happens behind the scenes in ensuring a seamless and systematic review process for measuring performance.
A consistent theme arose during our prep and live sessions, which centered on the inherent inconsistencies that exist in reporting between GPs and LPs. This situation is compounded by the blurring lines between these parties as more and more LPs go direct, seek co-investments, and opt for separately managed account (SMA) vehicles over funds. Traditional metrics, such as “net IRR” are less meaningful and in some ways less directly comparable to Public Market Equivalents (PMEs) and other private benchmarks unless the calculation includes an understanding of the impact of fund-level credit facilities (aka “back-leverage”).
Similarly, valuation multiples are tricky to interpret without understanding the magnitude of the pro forma adjustments and comparability to the buy-in multiple and comparable public companies. Core characteristics about the GP, the investment vehicle(s), and the underlying investments are equally important to make sense of these financial and operating metrics to drive transparency and make better investment decisions.
In short, the key theme I keep going back to is this continuous need to KEEP IT SIMPLE in an ever changing and increasingly complex world. (Or as my husband often reminds me, “KEEP IT SIMPLE STUPID!” Thanks, love you too!)
In the spirit of K.I.S.S., I wanted to share my thoughts on the key metrics and characteristics that we at Ipreo focus on in order to help our GP and LP clients understand their aggregate performance in the asset class overall, the GP/vehicle performance (be it a traditional fund, co-investment and / or SMA), and the look-through to the underlying investments (be it traditional private equity, real estate, debt, infrastructure, etc.).
There are countless metrics and characteristics we could chose to track, but it’s critically important that we get the critical few right:
If an LP has 30 seconds to understand the inception-to-date performance of a particular GP / investment vehicle and its underlying portfolio, what would be the most critical metrics and attributes?
GP Fund / Investment Vehicle Metrics:
1. Net IRR to the LP
2. Multiple of invested capital
3. Public Market Equivalents (Net IRR and Multiple of invested capital)
4. Expense Ratio (the spread or [1 – Gross over Net IRR] at the fund level)
5. Leverage Ratio (the ratio or [1 – Net IRR with fund-level leverage over Net IRR without fund-level leverage])
Underlying Investment Metrics:
1. Primary financial metric at acquisition and current (defined)
2. Total enterprise value at acquisition and current
3. Implied valuation multiple at acquisition and current
4. Total equity value at acquisition and current
5. Gross investment-level IRR and multiple of invested capital
Key Investment Attributes:
1. Industry (based on the Global Industry Classification Standard, “GICS”)
2. Vintage (based on at acquisition date)
3. Geography (region)
4. Deal size
5. Deal type (e.g. carve-out, minority, public to private, sponsor-to-sponsor, other)
The above metrics and attributes seem simple on paper, but the reality is that it remains incredibility difficult to acquire this level of data while remaining confident that the metrics are defined consistently across the landscape. But what if we start with this simple list and get it right?
At Ipreo, we are focused on delivering high quality software and managed data services to our GP and LP clients. But it starts with keeping it simple. Over the course of 2018, we will be conducting GP / LP roundtables as we continue to tackle this challenge with our clients.
And on another note…
In the spirit of keeping it simple, I’d like to address Ipreo’s “i-DENTITY crisis.”
Over the past few years, Ipreo has seen a series of exciting acquisitions that expanded our solution suite for the private capital markets. And, understandably, as multiple solutions consolidated under a single brand, it has created some confusion.
Many people asked me and my colleagues at the PEI conference how our different products fit together. Here’s the simple answer: iLEVEL, iVAL, Qval, and Prism are now all solutions offered under the Ipreo corporate brand. By bringing all of these solutions together under Ipreo’s private capital markets division, we can continue to expand our core capabilities, enhance integration, and build valuable connections between market participants. More broadly as a company, Ipreo provides software, data and analytics to banks, public and private companies, investors and governments. If you are raising capital, issuing bonds, or launching an IPO, the odds are, you are likely using Ipreo. Each year, Ipreo’s mission-critical solutions enable trillions of dollars of capital to flow efficiently across the global capital markets. ipreo.com
Questions or comments? I’d love to hear them. Email Jaime.Hildreth@ipreo.com