When covid hit the global markets in early 2020, every investor the world over wanted to know their exposure – they clamoured for instant access to data on their holdings to understand how every portfolio asset would be impacted by lockdowns.
Fast forward to February 2022, and it was real-time data on exposures to Russia and Ukraine that were under the spotlight. Again, LPs did not just want to know about the funds they were invested in, but to understand the portfolio companies and their links to the impacted region. Throw rapidly intensifying ESG scrutiny into the mix – both at a GP and asset level – and managers are finding themselves under excruciating pressure to deliver insights they have never before been expected to provide.
“Private equity investments are rather illiquid, and now the majority of LPs want either daily or live performance data, which is not necessarily a match for the asset class,” says Jeffrey Drinkwater, senior director of fund sales at Intertrust Group. “Fund managers can give that, but in truth those assets aren’t seeing a whole bunch of change on a daily basis. Then there is the same demand for real-time data on ESG across the portfolio. Managers are in desperate need right now; they know they have to deliver this transparency for LPs, so they have to find a solution.”
Forthcoming fund managers
The expanding investor base is putting further pressure on demands for openness. Chris Thoume, global head of digital innovation at Sanne Group, says: “We are seeing large institutional investors with diverse portfolios increasing their allocations towards alternatives, and they are used to having readily available data that covers the full spectrum of financial instruments and securities in their portfolios.
“They can price a large percentage of their portfolio easily and frequently in the listed or open-ended space, allowing them to quickly see their exposure to jurisdictions and sectors, or even specific companies.
“It is not currently possible to achieve this valuation frequency in the PE space, but LPs often have to measure, and possibly adjust more frequently, during their risk management processes, especially during macroeconomic events where more frequently traded investment can be volatile. Providing LPs with the transparency to understand the fundamentals of the underlying investments in more detail can greatly support them in this.”
“LPs want either daily or live performance data, which is not necessarily a match for the asset class”
Managers find themselves facing a choice: either they invest in the technology to respond to investor demand in-house, or they outsource to a technology provider or fund administrator that can deliver a ready-made solution to the transparency challenge. Intertrust’s Drinkwater notes market sentiment: “In a recent survey, we found that 61 percent of CFOs want to outsource this to either a technology solution or an administrator, because they can’t do it.
“Over the last decade, private equity managers have become more open to the idea of outsourcing because LPs are demanding so much more access to data, and juggling that is just not their speciality.”
Kartik Shah, European head of private equity product, innovation and technology at Apex Group, says: “Firms are asking us all the time how they can get access to their data and slice and dice it to satisfy their internal needs, their regulatory needs and the demands of investors. Technology is really the big enabler.
“Managers are looking for a data self-service product, where we can house their data for them and push it back to them. Either that or they are looking at building their own data warehouse and they need us to provide standardised data feeds to go into their data warehouses and create one single point of truth.”
While larger managers might choose to invest in building their own solutions, many lack the in-house capabilities for those projects. “The mid-sized managers are asking what we can provide to support them,” says Shah. “They don’t necessarily have the expertise or the budget to build out their own warehouse, so they are asking us to develop a solution that gives them access to their data, and a visualisation tool that gives them the ability to run their own reports and dashboards.
“The LPs also want access to that data. They are no longer content with bespoke reporting and templates; they now want that data made available to them so that they can create and run their own analysis. They want to be able to look across all their holdings, often across asset classes, and they want to be able to look right down to the portfolio level.”
Portals are increasingly becoming industry standard, accessed either via the manager’s website or an app on the LP’s phone, to give investors instant access to core data.
Chad Longenecker, managing director and head of private equity at SEI Investment Manager Services, says: “Investors are requesting data more frequently from investment managers and they are asking for more expansive data that goes beyond what’s provided in traditional quarterly reporting. With these increased demands, we are seeing a greater adoption of managers giving their investors access to online portals, allowing them to see an expansive data set more frequently.
“Existing and traditional operating platforms may not be sufficient to manage operational challenges associated with providing the level of detail and transparency that investors are requesting. It’s been a challenge to provide this level of detail, which makes the growing ecosystem of service and technology providers an important component to meet growing investor demands.”
“There are specific tech solutions out there now to tackle this head-on,” says Charlotte Cruickshank, global head of fund solutions at Ocorian. “It is really important that managers can offer that transparency to remain competitive. We are seeing a new demand for portfolio-level data that we wouldn’t have historically held because investors weren’t really asking for it.”
Keeping up with the latest tech developments requires continuous investment, because the landscape is constantly changing. “We need to make sure we are able to deal with the latest demands,” says Cruickshank. “The blockchain may have a place to play here going forward, in terms of making sure we have one central source of truth that a number of parties can access. Likewise, AI and machine learning are already integrated into a lot of people’s systems, but we will see more and more use of those.”
“We are seeing a greater adoption of managers giving their investors access to online portals”
SEI Investment Manager Services
Ocorian uses eFront software to provide managers and investors with access to investment reports and data at the click of a button, deploys data visualisation software from Power BI, and uses cloud-computing technology Microsoft Azure to connect, combine and analyse data. “There will be managers that create their own tech solutions, but you need an army not only to implement those solutions but also to maintain them, with new technologies and new investor requests coming all the time,” says Cruickshank. “That’s expensive and requires a lot of people.”
One area where tech is rapidly increasing transparency is in the fundraising process. Rosemary McCollin, sales director at Vistra, says: “There are a number of players in the market that are creating investment or capital introduction platforms where funds are keen to upload their information so that investors can download it. Investors get access to the data on the fund, the due diligence questionnaires and all the details before they decide to invest, and then if they do want to invest, they can go through an entirely automated onboarding process.
“There are a lot of independent platforms doing that, as well as administrators like Vistra. We have added this pre-fundraising element to our portal and it makes sense for managers that we are already working with to use our systems for subsequent funds.”
Not only is tech smoothing the process for managers and their investors, it is also putting the administrator in a more critical role – that of the data organiser. By getting involved in fundraising, and by digging deeper into portfolio company data, administrators are becoming much more hands-on partners.
McCollin says: “I tell managers to let their administrators pay for the technology and let us worry about making sure we have the best in breed and keep it up to date. That way they can be a startup using the same platforms that have been built for the Carlyles and KKRs. Let us spend all the money on the state-of-the-art updates to create platforms that are useful to both the private individual investors and the biggest institutional LPs.”
Making an impact
Another area where tech solutions are still evolving is around ESG reporting. Here, the push for information from LPs and regulators is evolving rapidly and causing headaches for managers. Research from Intertrust found almost two-thirds of global private capital CFOs are investing in expanding their technology frameworks to meet ESG data processing demands, as 55 percent of investors say they will be looking for live or daily updates on ESG.
“Private equity has always been about innovation, but over the last 12 months there has been a huge need”
Drinkwater says ESG is extremely time-consuming for managers, but “it is the number one issue on their list. To win new business, they have to show they are on top of their game. The vast majority of managers understand they need a tech solution, but it’s not going to be easy to get that data flow from the underlying portfolio companies up to LPs and new investors.”
The challenge is compounded in ESG because there is so little consistency around reporting frameworks, what each LP is looking for, and what the challenges and metrics are for each portfolio company. Tracking the data over time is also particularly critical for ESG, where a ‘good’ level of carbon emissions will depend on progress and will look different for every business, for example.
Vistra’s McCollin says: “The world is going to need technology to create flexible ESG reporting depending on the frameworks and geographies that the data relates to. You are going to need a flexible system that can report across multiple frameworks and multiple regulatory requirements, and be agile enough that any investor can go into the system and pull out the real-time data that they need.”
The pace of technological innovation to facilitate transparency in the GP-LP relationship shows no sign of slowing, particularly as the asset class expands. “Private equity has always been about innovation, but over the last 12 months there has been a huge need,” says Apex’s Shah. “A big driver has been the number of fintech providers offering retail investors accessibility to the market. If you look at the way they are onboarding clients and offering transparent reporting, it is clear the industry needs to change.”