Alts managers slow to go with GIPS

A few institutional investors are now requiring their alternative investment managers to comply with CFA Institute's global investment performance standards, but adoption is slow.

Pension plans requiring GIPS compliance include the $69.3 billion Ohio State Teachers' Retirement System, Columbus; C$176.2 billion (US$171.7 billion) Caisse de Depot et placement du Quebec; and Norway's sovereign wealth fund, the $680 billion Government Pension Fund-Global, Oslo.

What's more, consultants indicate that GIPS compliance was a big factor in manager selection.

With the GIPS, the CFA Institute is trying instill a degree of consistency in the way returns are calculated. Because there are differences in the ways returns are calculated now, few alternative investment consultants actually use the internal rates of return produced by the managers. Instead, consultants calculate returns themselves.

“We take a fair-value approach and provide a detailed hierarchy on how to value securities,” said Jonathan Boersma, executive director, GIPS, at the CFA Institute, New York.

The standards provide a framework for reporting and some consistency in arriving at valuations and returns.

Alternative investment managers have been slower to adopt global standards than managers in traditional asset classes, Mr. Boersma said. “Firms that have a pretty strong business and are not compliant may say, 'Well we're not going to spend the time or resources in becoming GIPS compliant because we don't need to. We can attract capital without it.'”

But Mr. Boersma said he has “lots of concerns” about those managers.

“GIPS standards don't require things that most managers that are worth their salt aren't doing already,” he said. “I would be concerned why a manager would not be compliant.”

Stephen L. Nesbitt, CEO of investment consultant Cliffwater LLC, Marina del Rey, Calif., said while not revolutionary, the global standards for alternative investment managers promote consistency on how performance is presented, such as reporting IRR.

“There are a number of IRR calculations, and having consistency in how to do that would be important,” Mr. Nesbitt said.

This is not as big an issue with hedge funds as it is with private equity and other alternative investment funds, he said. Hedge fund returns are based on net asset values struck monthly and valuations that are audited annually by independent auditors, Mr. Nesbitt said.

“There's not a lot of mischievousness that can happen there,” he said.

Managers can be “more creative” on the private equity side, which involves valuation of assets and calculations of cash flows, Mr. Nesbitt said.

Cliffwater doesn't rely on managers' returns but, instead, obtains the cash flow data from the managers and calculates performance.

TorreyCove Capital Partners LLC, a La Jolla, Calif.-based private equity consulting firm, does the same thing.

“When TorreyCove evaluates private equity managers, we collect all of their underlying investment cash flows, review their valuations (and methodology), generally adjust valuations— which we believe to be aggressive — to derive our own view of their investment performance,” said David Fann, president and CEO of TorreyCove. “Even if GIPS was widely adopted, we would continue with our investment approach in order to evaluate managers in a consistent manner.”

He added: “Most private equity firms are not GIPS compliant and, to my knowledge, have no intentions to be. The GIPS verification process can be cumbersome, time-consuming and expensive.

“For it to be broadly adopted in private equity, an extremely powerful exogenous force would need to require it,” he said.

So far, consultants aren't requiring alternative investment managers to be GIPS compliant.

“We do not ask if firms are GIPS compliant, so this does not factor into our investment decision,” said Michael Ryan, head of research at alternative investment consultant and money management firm Hamilton Lane, Bala Cynwyd, Pa.

“I could see a firm that is GIPS compliant on the liquid asset side making an effort to become compliant in PE as well,” Mr. Ryan said.

Hamilton Lane is sometimes asked on requests for proposals for its money management services whether the firm is GIPS compliant. “But, I don't recall this ever coming up as a major issue with a prospect,” Mr. Ryan said.

However, becoming GIPS compliant would be a problem for Hamilton Lane because the firm has a number of managed and separate accounts that vary by vintage year and mandate.

“GIPS would complicate the presentation of performance by the strategy of underlying private equity fund,” he said.