Twenty years ago, a data room was sometimes exactly that: a place in which reams of critical fund information were stored. Investors wanting to perform due diligence on a manager might have spent hours poring over files in order to find the information they sought.
Today, data rooms are online repositories, revolutionising the way in which limited partners decide fund investments and streamlining the entire fundraising process. The rampant growth of new technologies could mean fundraising undergoes an equally significant change over the next decade.
Some managers see retail investors as the holy grail of fundraising. The relatively untapped market can be lucrative for those with the resources to do so; Blackstone’s private wealth unit had more than $60 billion of assets under management as of November and typically contributes 15 percent of each flagship vehicle raised.
Retail investors are a difficult nut to crack. Doing so is time- and resource-intensive as retail advisors are not always familiar with the intricacies of private markets, meaning Blackstone needs to spend time on the road educating the intermediary on the fundamentals of alternative assets and the various liquidity options available before meeting with its clients.
Some believe technology will be key to unlocking this pool of capital on a grand scale. Hong Kong-based Privatemarket Technologies, for instance, is a distribution platform for alternative investment funds that collects and commits capital from family offices and accredited investors that cannot reach a fund’s minimum ticket size. It has invested $100 million across seven funds since 2016 and its clients have around $2.3 billion to invest in private equity.
“Fintech could help managers tap the growing retail market,” Niklas Amundsson, managing director at placement agent Monument Group, says. “A handful of players already offer private equity to retail investors, but technology could make it more widely available. Private banks may launch asset management apps that would let you access the asset class on your mobile phone.”
Online platforms could take different forms. “It could be nothing more than a platform where investors are made aware of who’s fundraising, or it could evolve into a platform that pools capital to commit to a fund,” notes Darren Bowdern, head of financial services – tax at KPMG China, who assists clients on establishing direct investment, private equity and other investment funds in Hong Kong.
Such tools would carry a number of benefits for private equity. “Online platforms will certainly lower the cost of fundraising, for example by minimising the number of international investor roadshows,” says James Donnan, managing director at fund administration business Intertrust.
“Online fundraising platforms will also enable better access to information and drive greater transparency on aspects like investment strategy, project information and past performance.”
Staying in touch
The way we communicate has evolved dramatically over the past 10 years. Although mobile phones were once limited to calls and texts, private equity professionals now have any number of ways to converse at the push of a button, be it instant messaging, video calls or email.
“Everything that wasn’t done in person was [once] done over the phone; now it’s common practice to use video conferencing,” Monument Group’s Amundsson recalls. “Whatever the next evolution of video conferencing is – even if it’s a hologram – will improve the communication side of fundraising.”
Integrating technology into the fundraising process is not without its challenges. One issue is regulation: those looking to raise capital online would need regulatory approval in each market they operate in – a mammoth task for those wanting to raise at scale from a global customer base.
The rules for fundraising differ by geography. The US – while also the largest – is the easiest for private equity managers to access; anyone with at least $5 million in assets including their main residence is considered a professional qualified purchaser.
Although Asia has a similar qualified purchaser rule to the US, the EU has various protections in place, such as requiring those who want professional investor status from their bank to complete 50 securities trades each year.
There are also more granular challenges, like who is using the platform and where their capital is coming from. Know-your-customer might be difficult for asset managers raising capital via the likes of a mobile-app, Amundsson notes.
There are work-arounds; Privatemarkets, for example, uses an external partner to assist with KYC processes. Internal solutions are being developed elsewhere. “KYC issues could be addressed because over the past 18 months in the broader financial services space we’ve seen some of these processes beginning to be automated,” Bowdern says.
But some limitations could disadvantage the end user, rather than the asset manager. Online platforms showing fund profiles or due diligence reports may help LPs with sourcing, but takes away the crucial ability for investors to negotiation terms, Mei-ni Yang, principal at LP advisory Mercer, notes.
Uptake of fundraising platforms could be slow for reasons beyond just the technical difficulty. Private equity is subject to strict marketing regulations – particularly in the US – meaning GPs are often tight-lipped about fundraising plans – something at odds with plastering the vehicle on an online fundraising platform.
“GPs are very coy about disseminating information about themselves,” Eric Marchand, private equity principal at Swiss asset manager Unigestion, says. “They would tend to favour the more natural feeling of control via providing access to data rooms and depending on placement agents [or] IR departments.”
Platforms also suffer from something of an image problem. “A GP may not want to be on an online platform for fear of being seen as struggling to raise funds,” Marchand adds. “If you look at the existing platforms, more often than not the population of funds on these platforms are not blue-chip GPs. More established players may not want to be associated with the platform.”