This article is sponsored by SANNE
As institutional private equity investors flex their muscles, they are demanding greater transparency from general partners on a wide range of topics. Not only are they looking for more granular and specific data, but they also want the ability to access investment information on demand. This has led to increased outsourcing to service providers like SANNE, according to chief commercial officer Mark Law.
What trends are being seen by private equity asset management?
We are seeing several trends: Buoyancy and resilience in the alternatives market; a rising number of private equity funds; and, the increasing popularity of VC, particularly in the US. We are encountering LPs who are increasing their allocations, and many large investors who are asking for co-investments and want to be more cooperative strategic investors with funds. Consequently, the use of leverage is trending down.
We are also starting to see the rise of secondary managers, and more groups selling secondary investments. Private credit is featuring more prominently as a way of diversification.
In terms of strategies, buy and build is becoming more common, and GPs are finding that this approach requires more active portfolio management. Technology is increasingly important as exits are being expedited by digital transformation and technology at all sorts of portfolio companies.
How is the LP base changing and affecting the way GPs behave?
GPs and LPs are becoming more global and that is something everyone has to keep up with. There is increased investment in the US from overseas funds, with a growing interest in markets like China and Southeast Asia. The LP base is expanding globally and investors are looking for market diversification. Globalisation presents opportunities for SANNE to use its global reach and expertise across asset classes.
As the LP base expands, firms need people to ensure that companies and fund structures make the proper annual filings, are incorporated correctly, have the right constituents on the board of directors, and get audited according to the right timelines. In terms of investor services, LPs need to get reports accurately and on time.
Are GPs equipped to meet more complex reporting requests?
The reality is that it is very expensive and it’s a non-core activity, as it’s not revenue generating for them. As they fight fee compression, one of the options is to outsource to providers like SANNE to handle the middle and back office responsibilities.
If you look at a GP’s treasury, finance or COO function, its job is to support the investment team and the LPs. To perform all this reporting in house, they have to do a lot of additional things. They need to keep pace with complex regulations that cross many jurisdictions; they have to keep pace with latest accounting principles, whether that’s generally accepted accounting principles (GAAP) or ILPA reporting; they need to handle HR issues and keep technology up to date; and then they need to deal with auditors for the annual financial statement. That’s a lot to manage while the fund is making investments or looking to attract LPs around the world.
This is before we even factor in investor views on outsourced providers. As LPs are getting larger and more sophisticated, they want transparency and appropriate segregation of duties. That’s compelling them to request things, such as carried interest calculations, financial statements and NAV calculations, to be outsourced.
How are investor demands changing as the industry grows?
Investors’ core demands stay the same: Returns. But we are seeing evolution in management fees, transparency and reporting as those are the top contemporary investor demands for GPs to keep pace with.
GPs are accommodating institutional investor calls for additional disclosures and fee breaks. Fees are already under competitive pressure, and we see further pricing pressure on margins across all alternative asset classes, including private equity.
Another topic on the rise is ESG reporting. This is not new – it was initiated largely by the big public sector LPs – but it is becoming more mainstream. The challenge with ESG reporting is that there is no one size fits all approach. As the field develops further we will get all the right data points to meet this evolving demands, such as carry linked to ESG reporting.
Where do you see transparency going in the future?
Fee validation is becoming a critical issue. Investors want to ensure GP fees meet the LPA terms. LPs realise they have significant influence and will likely continue to challenge fees, particularly when performance might not justify high expenses.
For the GPs, it is very important that they maintain transparent dialogue with LPs about the costs of running their businesses. LPs are not being unreasonable – they don’t want management fees to be a profit centre, but they do want to ensure the manager can support the appropriate infrastructure.
Self-service reporting will become more common as LPs will want information outside regular reporting times. Being able to access a portal and download the latest financials is going to be more important.
Can you give an example of how service providers are adapting to those changing needs?
One example is our strategic investment into a company called Colmore, which has developed a technology solution in response to LPs’ needs to monitor and validate fees. They collate multiple data streams from LPs’ investments to actively produce reports that monitor and validate fees as part of ongoing LPA compliance and best practice.
It’s really exciting for us as it’s pushing out the added value capability not only to LPs, but also GPs. We are working with the Colmore team to tweak their offering so that GPs can use it as well. Managers who want to attract institutional money – especially large, public sector investors – and benefit from the cachet that brings, will need to provide this reporting. It’s a fair trade.
In addition, we are also working on our own portal, this is probably the most outward thing clients will see. The portal will allow much more self-service access for both LPs and GPs, providing them with transparent access to information whenever they want.
How important is the technology element to the service you provide?
Technology is very important but we try to ensure that it is largely unseen by our GP clients. Technology is not the object; the object is to deliver reporting accurately and on time.
We deal with significant amounts of data that needs to be gathered, classified and then processed. In the background, we are working on workflow management to keep track of all the data that goes out to our various teams. If there are any manual processes, they either need to be automated or be exceptionally controlled. We are investigating robotic process automation for rules-driven jobs that are repeatable and can be done by a bot.
But just as importantly, we need to have the right people. We recruit qualified accountants with relevant industry experience. Technology frees up their time to deliver more value-add services. Our clients look to us for stability and a partnership approach – they need to trust us and use us as part of their extended teams. Our company culture needs to gel with the GPs.