Taking into consideration the events of the last two years, LPs can be forgiven for wanting greater insight into the performance of their investments. Upheaval caused by the covid-19 lockdowns and Russia’s recent invasion of Ukraine cast an increasingly familiar pall over the private equity industry, creating a swell of demand for insight into the impact such events are having on LP interests.
Demand for growing volumes of data, and more frequent access to such data, shows no sign of waning. Indeed, in a recent study by Intertrust Group, The Future Private Capital CFO, more than 40 percent of LPs surveyed said that in the coming decade they will expect to receive on-demand data about their portfolio performance.
GPs and fund administrators already say they are no longer strangers to frequent requests for data – it is how they process these growing requests that will be the key challenge going forward. Here are three trends that highlight how the data challenge is impacting operations for GPs and their fund administrators.
1Outsourcing tech solutions
Reconciling a desire from LPs for almost real-time data on their investments is not something that necessarily aligns with the realities of the long-term nature of private markets investments, explains Jeffrey Drinkwater, senior director of fund sales at Intertrust Group. “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 Drinkwater. “Fund managers can give that, but, in truth, those assets aren’t seeing a whole bunch of change on a daily basis.”
Technologies such as LP portals are just one way in which GPs and fund administrators are trying to tackle the challenges of transparency within the system.
Much of the discussion around fulfilling LP needs is centred on an age-old dilemma – should GPs look to tackle such challenges in-house, or outsource them to third parties? According to affiliate title Private Funds CFO’s Fund Leaders Survey 2022, one in 10 respondents cite investor demand as a key driver of outsourcing, while almost half say the prohibitive cost of buying or building in-house solutions leads them to outsource. Notably, the proportion of respondents that point to a lack of internal capability and expertise as a key driver of outsourcing has increased over the last 12 months, rising to 47 percent from 38 percent in 2021.
For busy GPs that already have myriad competing demands on their time and resources, outsourcing to third-parties, such as fund administrators that have invested in tech solutions, presents one way of accessing state-of-the-art systems without the additional burden of running and maintaining them. This can be particularly helpful for mid-sized and smaller managers. “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 Charlotte Cruickshank, global head of fund solutions at Ocorian. “That’s expensive and requires a lot of people.”
2Gathering data on DE&I and ESG
The private equity industry has made strides on environmental, social and governance considerations in recent years, with GPs and LPs now galvanising around efforts to standardise the reporting of ESG data.
As the industry’s approach to ESG continues to develop and mature, LPs are increasingly calling for more granular data pertaining to diversity, equity and inclusion at the GP and portfolio level. According to the Intertrust study, around 30 percent of investors expect daily updates on DE&I over the next decade.
Such an uptick in demand is going to create a need for data even today, market onlookers say, with the recent focus on ESG data providing insight into what could be in store for DE&I further down the road. “As we have seen with environmental data collection in the private markets and calling out greenwashing, it is no longer accepted to ‘mark your own homework,’” says Andy Pitts-Tucker, managing director at Apex Group ESG Ratings & Advisory.
But DE&I data-gathering poses its own challenges from a quantitative perspective. “You can’t reduce complex and evolving capabilities to a score,” Chris Addy, founder and CEO of Castle Hall Diligence, tells Private Equity International. “There is too much focus on gathering the score and one-dimensional information around statistics.”
While the crux of the issue will be finding a way to overcome data collection issues and to share information in a meaningful way, external partnerships could play a role in facilitating progress. “By partnering with a third-party provider, funds can access not only the technology and platforms they require to efficiently collect and analyse data securely, but also the advice and support to help convert this data as the basis for actionable policies and strategies,” says Pitts-Tucker.
3The regulatory push for transparency
Meanwhile, regulatory bodies continue to further the conversation around enhancing disclosures within the private funds industry. In February, the US Securities and Exchange Commission unveiled a raft of proposals aimed at increasing transparency that would put further emphasis on the need for GPs to present data in a more timely fashion. This includes requiring GPs to provide LPs with quarterly statements about fund performance, fees and expenses. Should these plans be implemented in their proposed form, they will further add to managers’ growing reporting workload.
As one panellist at PEI’s CFOs & COOs Forum in New York in April noted: “The information requests we get from investors these days are getting more detailed. Then you have the SEC proposal”, which adds a further layer of disclosure requirements “that are going to be very time consuming for managers”.