The private markets have witnessed a substantial increase in managed assets over the last decade, attracting the attention of U.S. regulators aiming to enhance transparency through expanded regulation. With these regulatory developments, it’s time to re-evaluate the Global Investment Performance Standards (GIPS), which have evolved from being the gold standard for investment performance presentation to a tool that assists advisers in meeting new regulations.
With the continued influx of assets into the private market space, the CFA Institute, the global association of investment professionals, recognised that the initial GIPS standards were tailored to institutional separate accounts, providing limited value in the private markets.
In 2020, they introduced the “2020 GIPS Standards,” which brought about significant changes. These tweaks included a more flexible approach to valuations, particularly for real estate, endorsement of the broader use of money-weighted (IRR) returns, and allowed firms to lead with specific fund data, moving away from the conventional composite structure approach.
As regulators became more acquainted with private markets, they sought greater transparency in the presentation of fees, expenses, and valuations, aligning with the GIPS standards.
Notably, FINRA’s RN 20-21 mandates the use of ‘GIPS-consistent methodologies’ when presenting unrealised internal rate of return (IRR) performance to defined retail investors.
The SEC’s new and amended rules, including the Marketing Rule and Private Fund Reform Rule, have provisions that reference the GIPS standards. This acknowledgment underscores the GIPS standards’ reliability as a benchmark for performance reporting.
In response to these clear regulatory pressures, more than 90 private market firms have taken active steps to align their performance with the GIPS standards or adopt them at the firm level, marking a significant shift. The reasons behind this shift are multi-faceted:
Regulatory Safeguard: With mounting regulatory pressures, firms are turning to a framework that ensures compliance with a globally recognised standard—the GIPS standards offer that dual advantage.
Limited Partner Demand: Growing prevalence of the GIPS standards prompts industry-wide RFPs to inquire about or require compliance. Non-compliance could hinder fundraising efforts.
Operational Efficiency: Aligning with the GIPS standards streamlines processes and methodologies, fostering efficiencies and standardisation that make internal operations smoother and external reporting more transparent.
Compliance with the GIPS standards positions firms to strengthen investor trust, thanks to the robust and transparent performance reporting framework they represent.
As regulatory agencies continue to seek ways to enhance transparency in investment performance presentation and meet regulatory obligations, the GIPS standards can act as the pathway to help advisers meet the rising demand. It’s clear that the time for the GIPS standards in private markets isn’t just right; it’s opportune!
How ACA Global can help
ACA Global is the largest provider of GIPS compliance services to a diverse, global client base. As part of their range of investment performance services, their team can assist with GIPS Standards Feasibility Studies, GIPS Compliance, and Verification.
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