Enhance real estate investor transparency and reporting

ARTICLE | February 29, 2024

Authored by RSM US LLP

What do investors and the Securities and Exchange Commission (SEC) have in common? Both want more transparency from private equity fund managers.

Investors have become more diligent in reviewing their investments. Also, while the real estate market has been down, investors may apply more scrutiny. Emerging fund investors expect strong internal controls to reduce reputational, compliance and financial risks related to their investments, says Nate Ruey, an RSM US LLP risk advisory services partner. Manuals that spell out internal control policies and procedures on everything from cash management to cybersecurity help provide a holistic approach.

Greater investor transparency and complex reporting demands

Increasingly complicated tax reporting requirements have only added to the prevailing number of investor requests and other regulatory requirements firms must handle. Firms need access to industry-specific tax expertise to recognize, understand and navigate the reporting complexity and multiple reporting deadlines, as well as advanced technology that produces data at a more granular level. As fund administration becomes more challenging and costly to manage in-house, investment firms should consider outsourcing these complicated tasks to a credible and capable third party—one that can scale with the business to handle evolving investor, regulatory and tax reporting demands.

An all-in-one tax platform designed to give you access to the latest tech

Middle-market private equity firms need access to sophisticated technology with the latest and greatest updates. The digital landscape is evolving, requiring firms to become more innovative and modern. A higher cost of capital will limit investing in technology exploration, something leaders have little control over in the current conditions. However, you can control access to tools that optimize certain business areas, which is critical as you expand operations. At this stage, it is challenging to quantify long-term gains from artificial intelligence (AI). Still, companies should thoroughly evaluate all business areas, not just internal operations, to effectively prioritize where they deploy their capital expenditures toward AI and technology solutions.

Modify tax data: Scenario planning and hypothetical cash distributions

Our tax technology services are different from other companies in that ours offers the ability to see hypothetical distributions and scenario planning. Let’s imagine you’re looking to sell a property. You must consider state withholding or composite payments before distributing cash to investors. The last thing you want to do is sell an asset, distribute the proceeds to your investors and then have to call back capital come April because you have to pay state taxes. A modern tax platform can conduct a real-time hypothetical analysis and look at different scenarios. Scott Helberg, real estate tax partner at RSM, says, “If you sell $X, this is the amount you must pay in taxes. The platform already has all of the investor data, allowing tax advisors to look at it efficiently, which gives fund managers the confidence to hold back the correct amount of cash and distribute the rest to their investors confidently.”

Receive your K-1 tax forms in record time

Tax technology becomes a valuable tool for funds that have multiple tiers in their structure across a broad state profile. Fund managers can quickly see the impact of aggregating income across a portfolio and quickly ask, “What does this mean up to the investor level?” by producing K-1s quicker than usual. As deals get larger and structures become more complex, the K-1 delivery deadline often does not change. Potential investors will expect those forms by the agreed-upon deadline. It’s essential to have the proper technology and leverage it correctly to produce the necessary reports to your investors on time.

Transparency beyond the numbers—diversity strategies stand out

Investors require real-time transparency when it comes to their investment performance, but reporting on your firm’s commitment to diversity, equity and inclusion (DEI) may also be a differentiator to attract investors. Higher operating and investing costs are challenging fund managers to proactively protect the bottom line. Energy efficient projects and carbon reduction strategies have been at the forefront of ESG committees but they will come at a high borrowing cost further reducing returns. Alternatively, accelerating the trend toward greater diversity can be a low-cost, high-reward strategy.

More diversity in leadership positions actively fosters a culture of adaptability and promotes innovative solutions to source deals and fundraise in a rapidly changing market. As SEC and global regulations surrounding DEI reporting become more complex, defining standardized metrics and disclosures can be a challenge, especially for those lacking established track records.

"Discovering the possibilities of a formalized strategy that aligns to your firm’s values and creating data-driven track records to show progress and tell your firm’s story can manage risk, enhance your reputation and deliver stronger future outcomes."

Lauren Gerdes, Real Estate Senior Analyst, Senior Manager, RSM US LLP

The takeaway

Today’s investors require more transparency, and technology can go a long way toward providing clarity. In addition to seeing financially solid returns, investors are demanding more transparency in the industry, especially regarding performance data and risks. Fund managers can give investors greater confidence by creating well-written fund documents, conducting external reporting on a quarterly and annual basis that covers all investments, and being vigilant about disclosures. With the challenges in fundraising and lending, DEI can provide additional value to give fund managers access to capital and promote greater team collaboration in this environment. Ensure your DEI strategy meets regulatory rules and showcases your ability to manage DEI goals effectively.

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This article was written by Lauren Gerdes, Scott Helberg and originally appeared on 2024-02-29.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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