Despite it taking over the headlines since the 2008 credit crisis, transparency practice in alternative investing has barely changed in years.
The lack of progress is due more to the nature of alternative investments and the very real hurdles to providing and using transparency than an unwillingness to seek common ground.
However in a 2017 survey Northern Trust conducted with The Economist Intelligence Unit transparency came out as a top priority among alternative investors.
But in the absence of any market practice standards, investors continue to work through bilateral agreements, side letters and other arrangements to get what they need.
While this might work for some, a more focused industry-wide approach is needed to eradicate the complexity from the process. [Click the graphs below for a closer look]
At Northern Trust our experience has been that few organisations treat transparency strategically. But instilling the same discipline to your transparency efforts as you do to other aspects of your business will reap dividends.
To do this, we advise you develop a four-step transparency “tool kit” to aid decision-making across your organisation.
The four-step plan
1. Identify stakeholders
While transparency is critical for risk management, decisions around transparency affect much broader swathes of your company. This includes front office, sales, leadership, operations, investors, and trustees and fiduciaries.
2. Prioritise types of transparency
As a manager, providing some types of transparency may be an important part of your strategy – for example funds focused on environmental, social and governance strategies, while providing other types might constrain your potential returns – such as valuations for a private equity fund.
“The most productive conversations we have about transparency are those where investors are crystal clear about their ultimate aims and goals.” said Kathleen Olin, chief compliance officer at Indus Capital Partners.
3. Rank key questions and build your toolkit
Once you have identified stakeholders and prioritised the types of transparency you need, you’re ready to begin developing your tool kit. Your plan should revolve around what you want to achieve. The insights you gain by refining what you mean by transparency and what trade-offs you’re willing to make to achieve it can help you specify your transparency related goals.
From here, a list of strategic questions emerges. The specific questions on your list will depend on what you want to achieve in relation to transparency. This can be divided into two sections, for managers and for investors.
- What “industry standard” levels of transparency do our peers provide?
- What regulatory requirements might apply to us or to our investors?
- What are our operational processes for compiling/delivering transparency data to investors?
- What’s the minimum acceptable level of transparency in an investment?
- Who certifies that an investment meets transparency standards?
- How do pre-post-investment assessments of transparency differ?
Answering such questions will lead you to a set of practices that work in concert with your broader organisational strategy and goals. Having executive sponsorship for these practices can help create awareness and promote compliance.
Also be aware of assumptions you make when building your transparency toolkit. Just because you have always done something one way doesn’t mean it is the only possible solution. To find common ground, consider different ways to accomplish your goals.
4. Establish practice for review
Today’s solutions can quickly become tomorrow’s challenges if you’re not prepared to adjust your strategy. Regularly review your transparency toolkit at least once a year. This allows you to assess changes in market practice, review organistional strategy, and test and confirm controls and procedures.
- Trends in capital structure and fund design and their effect on transparency
- Evolving investor expectations and needs in response to market volatility, regulatory demands, thought leaders and other factors
- Fintech innovation and disruptive technologies such as blockchain and artificial intelligence.
Regardless of how you design your process, deliberate review and adjustment are essential to making sure your actions remain aligned with your long-term strategic goals.
Of course there are natural barriers to transparency. For example, managers may face challenges in providing the requested transparency because of the complexity of the data needed, or the potential damage providing the information might cause them. These issues are not easily overcome and can make delivering transparency more costly than either party may want.
Be aware that no magic bullet exists that fully meets the needs and objectives of all parties at all times. Especially when it comes to transparency, compromise between individual investors and their managers is important.
But if the parties have complementary objectives, the fund is more likely to succeed. If both parties think about their relationship in a different light and approach their interactions as a partnership, finding consensus on transparency may be easier.
As the chief operating officer of a large corporation said, summing up their experience on getting the transparency they need: “if you know what you need, can have a knowledgeable staff member articulate it to the manager clearly, and show some patience and empathy, you will get what is needed.”
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