LP Radar: Platform investment

Despite the advent of new technologies, private equity remains largely the same business today that it was two decades ago. OK, so maybe everyone in private equity carries an iPad everywhere these days. But the fundamentals of the fund investing process have remained largely unchanged.

Recently, however, a number of third-party groups have tried to shake things up with innovative online tools to help with making and managing private equity investments. Last year, Antoine Dréan, chief executive of placement agency and secondary broker Triago, launched Palico, an online platform that charges an annual subscription fee to provide an electronic marketplace for fundraising, secondaries and co-investments. The platform, which allows LPs, GPs and advisors to network and engage with each other, has already attracted 1,800 users in 62 countries.

“Those who have actually tried it love it,” says Dréan. “But it’s new, so a lot of people are working the old fashioned way. And that’s fine.”

In August, Toronto-based institutional advisory firm Setter Capital launched a free online platform called SecondaryLink, which allows buyers and sellers of secondary interests to connect with each other and see who is interested in particular funds. Since going live, Secondary Link has grown to nearly 700 members; roughly 85 percent of these are institutional investors (the rest being mostly agents).

“It’s not an online exchange,” stresses Peter McGrath, Setter’s founder. “SecondaryLink allows investors to anonymously list themselves as buyers for speci?c funds and for sellers to search over 4,000 funds and connect with the relevant buyers of each fund. You can look at the pro?les of others and invite them to connect and collaborate on diligence and secondaries. Essentially, it’s about creating a collaborative and con?dential community.”

Setter is not the first firm to create an online platform for secondary opportunities. But the traction it seems to be getting suggests that it may have the proposition right (secondaries is also a part of Palico’s offering, but it differs in its focus on primary fundraising).

Importantly, both Palico and SecondaryLink allow LPs to stay anonymous while exploring opportunities. Nonetheless, the question remains: are LPs willing to change the way they look for fund managers, at least early on in the process?

“Absolutely,” says one southern US-based pension fund. “As smarter people than me step back and think of different ways of taking data and presenting information, that’s always beneficial.” Still he adds, conducting online due diligence on fund managers can only take LPs so far.

“Due diligence in the private equity space has been a much more interpersonal process. You’re making 10, 12, or 15-year commitments with teams and trying to understand processes, people, opportunities, macro environments and pull it all together. The data can’t illuminate nuances of management team cohesiveness or management team effectiveness.”

Equally, the integration of online platforms and private equity remains a largely untested proposition.

“If that becomes more of a social media exercise versus a private offering memorandum, does it change the nature of exactly what you’re buying?” the LP wonders.

It remains to be seen whether tools like these will improve or streamline any parts of the investment process.
But Setter’s McGrath is bullish (as you’d expect). “It’s a great tool for do-it-yourselfers, or for those trying to get a sense of the market and the liquidity of their portfolio,” he says, pointing out that another notable feature is the ability to build a network of contacts for collaborating on due diligence and secondaries. Collectively, SecondaryLink members have added over 3,000 funds to their “shortlists,” have listed themselves as buyers for 1,350 funds and have expressed a willingness to collaborate on diligence on 1,135 funds, according to McGrath.

Perhaps the biggest advantage of these platforms may be in saving time. As LPs are being squeezed on costs and human resources, anything that can expedite preliminary exploratory work represents an attractive prospect.
“I think some of the quantitative aspects of it can be at least collected at one place,” the LP says.

Another useful aspect is that they can serve to unite LPs and GPs in different geographies and time zones – an important factor in an era when people are looking globally for investment opportunities.

And when it comes to secondaries – which both Palico and SecondaryLink cover – this increased connectivity between investors could potentially lead to more efficient processes.

“We’ve certainly seen increasing efficiencies, particularly in plain vanilla transactions, and this could reinforce that,” says David Parshall, co-founder & managing director of New York-based PEI Funds, which specialises in smaller private equity secondary purchases (most of which are not plain vanilla).

“A lot of the recent activity over the past few years has been driven by LPs, particularly those that are faced with Dodd Frank or Basel III limitations … So networking and social media may be somewhat helpful in that regard.”

Online platforms such as these probably won’t revolutionise the private equity industry, at least not in the immediate future. But LPs should keep an open mind when it comes to new ways of exploring investment opportunities. In an increasingly competitive environment, those who cling stubbornly to age-old methods of doing business risk falling behind.