Is Now the Right Time for Compliance with the GIPS Standards in Private Markets?
The private markets continue to see an increase in assets managed over the past decade, something that has captured the attention of the U.S. regulators as they look to expand regulation in the pursuit of transparency.
With these recent regulatory developments, a reexamination of the guiding principals that are the Global Investment Performance Standards (GIPS®) may be warranted. These principals are no longer just the gold standard for the presentation of investment performance, but can also aid advisers to meet new regulations.
1. Early influences: With the continued influx of assets into the private market space, the CFA Institute – the global association of investment professionals – recognized that the initial GIPS standards, as written, were tailored to institutional separate accounts, and so provided limited value within the private markets space. In 2020, they revamped the GIPS standards to encourage broader adoption with private fund managers. This foresight set the stage for a smoother integration of the GIPS standards into the private market ecosystem.
Dubbed the "2020 GIPS Standards", these changes included:
A more flexible approach to valuations, particularly for real estate
Endorsed the broader use of money-weighted (IRR) returns
Allowed firms to lead with specific fund data, veering away from the conventional composite structure approach
2. Regulatory focus toward private markets: As regulators became more familiar with private markets, they began to look for more transparency in the presentation of fees, expenses, and valuations. Recent regulatory policy has borne a strong resemblance to that of the GIPS standards.
- FINRA's RN 20-21: A more explicit directive, FINRA’s notice specifically mandates the use of ‘GIPS-consistent methodologies’ when presenting unrealized internal rate of return (IRR) performance to FINRA defined retail investors.
SEC's new and amended rules: The Marketing Rule and Private Fund Reform Rule introduce a slurry of new requirements around the presentation of performance. We observed in both final rules that the CFA Institute’s comments are thoughtfully considered and there are times the GIPS standards are used as a reference point for certain provisions. Specifically:
The SEC Marketing Rule: When discussing related account performance, the rule specifically pointed towards methodologies which are consistent with the GIPS standards. This subtle endorsement signaled the SEC's acknowledgment of the GIPS standards as a reliable benchmark for performance reporting.
The SEC Private Fund Reform Rule: This rule underscores similarities with the GIPS standards, particularly in terms of return calculations and presentations for varying fund structures. The overlapping requirements around the treatment of recallable distributions, mandated use of investor capital calls and distributions in performance, and the inclusion of performance with and without the use of subscription lines of credit are suggestive of the influence of the GIPS standards.
Observing the industry shift
ACA is firsthand witnessing a significant pivot within our client base in response to these regulatory pressures. Over the past two years, we have seen over 90 private market firms take active steps to align their performance with the GIPS standards and/or adopt the GIPS standards at the firm level. This rate of adoption is more than 10 fold what we have observed in prior years.
Why this shift?
1. Regulatory Safeguard: With regulatory pressures mounting, firms are looking for a framework that not only ensures compliance, but does so with a recognized global standard. The GIPS standards offer that dual advantage.
2. Limited Partner Demand: With the growing prevalence of the GIPS standards within the private market space, industry wide RFPs are increasingly inquiring about or asking for compliance with the GIPS standards. If such a trend continues or accelerates, non-compliance may become an impediment to fundraising.
3. Operational Efficiency: As firms align with the GIPS standards, there's a streamlining of processes and methodologies. This can lead to efficiencies and standardization, making internal operations smoother and external reporting more transparent.
4. Investor Confidence: Firms are in a better position to bolster investor trust, given the robust and transparent performance reporting framework the standards represent.
As regulatory agencies continue to seek ways to increase transparency in the presentation of investment performance and meet regulatory obligations, the GIPS standards can act as that path to help advisers meet the increased demand. As the narrative continues to unfold, one thing becomes clear: the time for the GIPS standards in private markets isn’t just right; it's opportune!
How we help
ACA is the largest provider of GIPS compliance services to a diverse, global client base. Offered as part of our range of investment performance services, our team can help support you with:
GIPS Standards Feasibility Study
GIPS Compliance and Verification
Reach out to your ACA consultant or contact us to learn how we can help you claim and meet your GIPS compliance obligations.