State Street: Going deeper with data

As the PE investor base becomes increasingly global and diverse, GPs and LPs are harnessing data to mine more investment strategy and portfolio performance insights, says State Street’s Jesse Cole.

This article is sponsored by State Street.

How has the data flow from GPs to LPs developed in recent years?

Jesse Cole

You have to start by understanding the LP client base of GPs, which has become more diverse than ever, both geographically and by investor type. The LP community encompasses pensions, endowments, insurance companies, family offices and high-net-worth individuals from around the world, each of whom wants different granularity of information, as well as delivery by more digital means. Increasingly, the mass affluent are allocating more of their capital to private markets too. 

The upshot is that managers are now facing a much larger, broader investor audience with different perspectives and varying expectations around the data they want. It used to be the case that a manager compiled a pitchbook and held quarterly meetings with large institutional investors, but things are becoming much more advanced. GP reporting would have focused on headline committed capital, called capital, distributions and internal rate of return. 

What we see now is demand for more frequent information about the performance of underlying portfolio companies, ESG, and return characteristics at a very granular level. A GP must be much more sophisticated to meet these requirements and be able to package data in multiple ways. In the mass affluent space, for example, managers will deal with the wealth advisory community, which is an entirely different clientele to the institutional investor base.

How GPs organise, manage and make datasets available in response to changing investor demands is going to be a major theme for the asset class in the years ahead. It boils down to the fact that if you are performing well, and providing good information to investors, there is a higher probability that they will want to allocate more capital to you in the next vintage.

How are GPs adapting to more demanding LP expectations around reporting and data sharing?

State Street’s recently published Private Markets Study 2023 reports on survey data of nearly 500 private equity professionals and provides some interesting insights into how firms are responding.

A headline finding was that, for 60 percent of those polled, the top challenge was how to integrate data into risk frameworks and manage the transition from legacy systems. Under a third of respondents felt they had really advanced and developed in this area. The topic is obviously a big focus for the GP community. Firms have a lot of different data in different places and the challenge is building the infrastructure to pull that together in a structured, quick and meaningful way.

Technology is part of it, but it will only work if you have governance in place to normalise data across multiple private markets asset classes. That piece is very challenging, and the community is turning to service providers such as State Street to help manage investment data better. 

Reporting considerations aside, how are GPs and LPs thinking about data for their own internal purposes?

While GP-LP reporting is a key focus area, organisations are undoubtedly embedding data management and analytics into their own operations.

For GPs, collating and packaging data isn’t just about communicating with investors, it goes to the heart of how firms operate and make decisions. For multi-strategy private markets managers, there are multiple personas within organisations that require insights. Risk managers, investor relations partners, compliance groups and chief investment officers need data to manage portfolios and assess the impact of individual deals to the overall risk profile across all the firm’s investment strategies.

Another interesting finding from our survey was that 39 percent of respondents described themselves as inefficient at both fundraising and investor relations. Data plays an essential role in addressing this, as managers can use data to find out more about their investors. 

As mentioned, the investor base is more diverse than ever. GPs that can dig deeper into what specific investors want and understand what individual LP risk and return expectations are, will be much better placed to meet LP needs and tailor strategies to fit their requirements, helping to maintain these relationships for future capital raising. 

If we move onto the LP side, in addition to the type of reporting they want from GPs, investors are also looking at how to use data to deepen visibility of the entire portfolio. A large, sophisticated institutional investor, for example, won’t just have private markets exposure. There will also be public market investment allocations, and they will want to form a view of all asset classes across the whole portfolio.

LPs want to evaluate risk and performance across public and private markets, as well as by geography, sector and along thematic lines, like ESG. There is a real need for data solutions that help not just the GP community but also the LP community, particularly large institutional asset owners, to manage public and private investment information. It really all comes down to data.

What, then, should the PE industry as a whole be aspiring to when it comes to harnessing the full potential of data and analytics?

For the GP and LP community, the immediate aspiration is how to efficiently get information organised and shorten the timeline for delivery of fund values and reporting. The biggest complaint that I hear from investors is simply that it takes so long to get to those numbers. 

Standardisation will speed up the process and the Institutional Limited Partners Association reporting template has helped, but you still see investors and managers presenting what is essentially the same piece of information in myriad formats. There is still a way to go.

There is also significant appetite among GPs and benefiting LPs to digitalise the fundraising process and make it easier for investors to subscribe to private investments and gain reporting – all of which will require modernisation and better movement of data too, whether that is through application programming interfaces or other toolsets. Looking further out, innovation and use of advanced technology like blockchain and tokenisation will continue to gather momentum. 

If we then look at the GP community specifically, the focus is on building the tools and internal processes to help managers improve how they collect, normalise and maintain investment data. The technology exists, and improving and testing use cases in private markets is happening. 

Standardisation and adoption across this diverse community (GPs, LPs and data sources) will be the bigger challenge as many will need help transitioning from legacy environments to future ones with a significant parallel period. With the continued growth we are seeing in private markets, collaboration across service providers, GPs and industry utilities will be key to advancing data modernisation. 

Jesse Cole is global head of private markets product at State Street