Lifting the veil on fund performance critical for PEs during Covid-19
The often-cited ‘opaque’ nature of PE funds is a function of the difficulties of valuation of illiquid assets and long investment horizons but also a reflection of the lack of technology investment by smaller PE providers. The importance of providing improved transparency is now being underlined by this pandemic.
Private equity has long been a target of frustration from LPs around the lack of visibility into portfolio performance relative to more ‘transparent’ asset classes such as equities or mutual funds. In recent times there also appears to be growing interest in ‘semi-transparent’ classes such as Active ETFs.
The ability for the PE market to curb the impact of Covid-19 collectively and with LP commitment volumes and databases intact will rely in part on addressing these concerns, and technology provides many of the answers.
Investment in technology however has lagged other industries. This is understandable. Many of these firms are not in themselves large-scale operations, and therefore lack the resource to make the significant investment required to implement expensive core systems, unify the enormous volumes of portfolio data and serve it to LPs on secure online portals optimised for client experience across multiple devices.
The challenge however is that expectations are high. Newer ‘digital native’ generations are conditioned to expect slick interfaces and seamless data transfer across their selection of platforms, and far greater control over what data they consume. In addition, they are conditioned to the experiences gained from significantly better resourced consumer services such as retail banks, who have invested heavily in experiences over the past decade. Increasingly however, even older generations have also had their expectations elevated as they adapt to the growing digitalisation of financial services.
There is still very much a ‘watching brief’ placed on the private equity industry through this pandemic. Although initially deal volumes fell off a cliff, it seems (from current Preqin data) that commitments activity and fund raising are in a state of slight recovery, as investors scour the environment for yield. We are also seeing record highs in the secondaries market. However, there is understandably a far greater focus on initial and ongoing due diligence, and as a result private equity firms which fail to be seen (if not actually address) these concerns run the risk of losing engagement from LPs and having committment pipelines evaporate. A potential ‘flight to quality’ will materialise, with lines drawn on whether the provider can help LPs understand and manage risk via technology.
Technology investment key to continuing to thrive
This is a significant challenge for sub-scale private equity firms already facing pandemic-trigger margin pinch. Prudent investments in technology will enable sub-scale PE firms to deliver to expectations of LPs in terms of understanding portfolio performance.
It is imperative through this pandemic that PE providers are mindful of the need to satisfy growing needs for transparency, access and control in order to bolster commitments and maintain engagement from skiddish investors. Technology investment will be key.
Such investments may take the form of:
- Core fund management, administration and accounting platforms to improve operational efficiency
- LP-oriented online portals, providing 24/7 access to both portfolio and asset-level data, in as close to real time as possible
- RPA and workflow investments seeking to automate administrative tasks and streamline operations
- Investment in CRM and digital communications technologies for efficient prospective and current LP communications
- Cloud architecture and open API enabling the rapid and controlled transfer of data between internal systems and potentially externally
- Investment in leading data feeds to aggregate information for convenience
- Investment to replace paper-based processes such as wet-signatures with contemporary digital equivalents e.g. DocuSign.
- Investment in core operating systems to administer funds and reduce operating costs e.g. eFront.
- Sub-scale private equity firms face significant headwinds exacerbated by their lack of historical technology investment
- Delivering greater transparency in portfolio performance will be critical to maintaining LP confidence and to future capital raisings
- Confidence is critical to allow sub-scale PE funds to take advantage of the opportunities present in volatile markets
- The critical risk is that sub-scale PE funds may be left without sufficient access to funds to compete for opportunities against better-resourced fund managers or needing to take on additional risk levels in order to maintain or grow portfolio size
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