Sun, 19/02/2017 - 14:32
James Williams writes that CEPRES has rolled out a new platform to give institutional investors a way to effectively benchmark private capital market investments.
The PE.Analyser uses technical and fundamental analysis to achieve a three dimensional view into their investments. It is the first benchmarking platform of its kind and by design, it will allow investors and fund managers to exchange investment data in a secure environment.
“The private market industry (PE, RE, infrastructure, private debt) is getting very large, but the way it is treated, from a quantitative perspective, is still far behind compared to the sophistication with which stocks and bonds are analysed. We think PE.Analyzer will be the next logical step in the development of the private capital markets,” says Daniel Schmidt (pictured), CEO of CEPRES.
He hopes that the platform will achieve two goals: to make the process of investing in private capital funds more efficient, and to bring a higher level of understanding to the asset class.
These two points are essential to enhancing the investment process, both for LPs and GPs. “The platform will help GPs to better understand their investors, craft the right message, and find the right investors in the fundraising process. This should make the investment process and the fundraising process more efficient and sophisticated,” says Schmidt.
There are two parts to the platform. Firstly, the analytical part where PE.Analyzer helps LPs to understand the quantitative background of returns, of risks, of cash flows and so on. By analogy, it will work similarly to a Bloomberg terminal in terms of the information the end user gets on stocks and bonds.
“In the private markets, PE.Analyzer is beneficial for both LPs either with their own internal investment processes and to verify external advice. There is also a strong and growing need for advisors serving LPs to have more sophisticated tools to serve their clients,” says Schmidt.
Secondly, PE.Analyzer operates such that the LP gets market statistics and allows them to analyse a range of managers, based on a tacit agreement between both parties; the GP will only allow the right category of investor to review their performance and track record.
“PE.Analyzer acts as an automised broker where fund managers allow LPs to look at their track records, see what they have delivered to investors in the past, and make them better understand how and where they invest.
“By giving them more structured transparency, it makes it easier for LPs to invest because they understand the manager and gain confidence. One side can better analyse and understand the investment proposition (the LP), the other side can create faster confidence (the GP) and both sides get to benefit from a closer, more efficient alignment,” explains Schmidt.
One might think that PE managers would naturally guard against opening up their doors to LP review but the opposite seems to be true. So far, CEPRES has approximately 2,700 funds on the platform, 36,500 deals and covers USD4.2 trillion worth of PE-backed companies. It is averaging 50 new registered users per month.
“Are fund managers happy disclosing information to potential investors? Yes, they are, because they recognise it is treated confidentially and helps them improve their fundraising process,” suggests Schmidt.
“They obviously won’t disclose this information to everybody, only to potential LPs who they think could be valid investors. They would ordinarily share such information via email and send different versions to different LPs – a huge workload; now they can do it in a more secure, structured way. Moreover, the manager can self-analyse in advance to determine whether LPs will view them favourably. If they identify potential weaknesses, they have the chance to address them. This gives GPs the chance to view themselves through the eyes of an LP.”
So far, institutional investors using the CEPRES platform have conducted due diligence on USD1.9 trillion of Buyout, Growth, Venture, Private Debt, Infrastructure and Real Estate funds.
Based on those 36,500 deals, LPs can analyse monthly cash flows, track revenue developments, calculate correlations of revenues to returns; all granular data points that provide a greater level of sophisticated analysis that an investor otherwise wouldn’t have.
“We actually started CEPRES back in 2000 where we emerged out of a scientific research project,” says Schmidt, discussing the origins of the firm. “As more European institutions, such as insurance companies and pension plans, invest in private markets, the risk is that they make inadvertent mistakes because of a lack of data and investment analytics, which was evidenced by the crash of the venture capital bubble. Out of this crash, the European Commission said to more than 10 universities, ‘Please come together and work out a way to better analyse private equity from a risk perspective’.
“I was part of this group. We started reaching out to GPs to ask whether they would like to share their data. As you can imagine, initially all of them said ‘No’. There was nothing in it for them so we had to find another solution.”
The solution was to become part of a large LP with a large balance sheet to invest in PE. CEPRES was, at the time, part of an investment management business and executed due diligence and portfolio structuring processes.
With this LP backing CEPRES could convince GPs to be part of the CEPRES network. “We convinced many GPs but nevertheless it took 10 years to develop the database. Then, in December 2010, we decided it was time for CEPRES to become an independent entity in order to be completely objective and not have biased interests.
“Today, we work with LPs around the world including North American, European, and Asian pensions, insurers, family offices, advisors, etc to help them better understand the benefits of investing in private equity, how they can improve their investment decisions, and how to evaluate investment outcomes. All this is then implemented as data and analytics into the platform,” adds Schmidt.
Considering that PE.Analyzer processes hundreds of thousands of transactions and trillions of dollars of investments in a matter of seconds, Schmidt says: “What our developers and quants have achieved is astonishing.”
Recently, using PE.Analyzer to analyse thousands of privately held Infrastructure assets, CEPRES found that since 2002 there was a beta (correlation) to the US corporate bond market of -0.9 and an alpha of 19.5 per cent.
The results were derived from the new PE.Analyzer Alpha Beta Framework that uses regression analysis to calculate the risk adjusted return (alpha), together with the correlation (beta) to an underlying market – in this case US corporate bonds.
“Infrastructure, as a yielding asset, can be a useful alternative for liability-driven fixed income investors, like pensions and insurers seeking higher returns. For those especially worried about volatility and downward pressure on public markets, PE.Analyzer shows that private infrastructure can help hedge risk and enhance a balanced portfolio,” says Schmidt.
This ability to benchmark GPs deals could be an important enhancement and whilst Schmidt doesn’t think it will change the way that people think about why they should invest, it should give them greater efficiency. They will be able to perform analysis on a much wider range of GPs in a much shorter timeframe.
“One insurance company told us that on average the time it took to perform fundamental analysis on a manager, gathering the data, crunching it, etc, was three weeks. When they do it today on PE.Analyzer, it takes them 20 minutes and they can now concentrate their valuable time on the relevant qualitative due diligence,” confirms Schmidt.
Schmidt confirms that in the next few months, CEPRES is planning to roll out a several groundbreaking applications for the platform.
LPs can analyse their portfolios, strategically & tactically decide where to invest, get connected to range of fitting GPs and get regular new and groundbreaking services to enhance their investment process.
“Our goal is to offer a complete investment platform by connecting LPs, GPs and advisors and support them to be more professional and efficient in the private markets,” explains Schmidt.
He views PE.Analyzer as important as Bloomberg terminals being introduced to the stock market industry that today are also used by all market participants.
“It’s an asset class that is getting bigger and it’s only possible to invest into that asset class if certain standards are met. Our platform is just a logical development of the industry. We won’t be the only one, but we do have a first mover advantage. Systems like this will become the accepted standard in a few years,” concludes Schmidt.