Nearly a third (30%) of nonprofits recently surveyed said they plan to increase their allocation to alternatives in 2021, with another 65% saying their allocation will stay the same at a minimum. Within alternatives, use of private investments — specifically private equity — continues to grow, as more than three-quarters (78%) of not-for-profits that invested in alternatives allocated to that asset class.1
In speaking with the investment staffs of many large institutional investors, one common challenge heard repeatedly is performance reporting when it comes to private equity. The specific challenge is around how to address the benchmark mismatch for performance reporting, which increases in importance depending on how much of the overall portfolio the organization allocates to private equity.
Many investors use public market equivalents (PME) to benchmark private investments. While the valuation dates are consistent for the PME benchmarks, the same is not the case for the private investments. Reporting data for private investments often lag the valuation dates used for the benchmarks, resulting in a mismatch in the timing of when those values are calculated and the date used for benchmarking (e.g. quarter end).
Addressing this challenge
Since most custodians will commonly use official valuations and not estimates for NAV (net asset value) in their reporting, the result is reporting that does not always give an entirely accurate view into how the holdings performed. The release of official NAVs may not occur until months after period-end. In an effort to get a truly accurate view, it is important to use accounting systems that can handle “back-outs” — an accounting term meaning a reversal of a previous record — and to offer the ability for re-booking months after the effective date.
One way to address this is to create a fund accounting process with two valuation records. One would be the general ledger, consistent with the custodial records using official valuations. The second book would use an effective date that provides estimated valuations and gives a more real-time and accurate view into the performance of those investments. Additionally, the second book would provide the flexibility to allow for back-outs and rebooks once a PE manager provides its official NAV.
Investment staffs are constantly looking for advantages in collecting and consolidating data. The process described above can help collect the most accurate and up-to-date information when it comes to reporting.
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1. SEI Nonprofit Investing Survey 2021, seic.com.
Information provided by SEI Investments Management Corporation, registered investment adviser and wholly owned subsidiary of SEI Investments Company.
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