11. Real-time data analysis
Investors across the private markets industry have been ramping up their requests for more data from managers to improve transparency within the GP-LP relationship.
Intertrust Group’s Fund CFO Focus 2022 survey found that managers anticipate more frequent requests for updates from investors, whether live on demand or daily, for information regarding portfolio performance and cybersecurity. However, the same report found that investors are expected to be satisfied with less frequent reporting in ESG or diversity and inclusion.
Explaining investors’ expectations regarding live access to data, Jonathan White, global head of fund sales at Intertrust Group, told Private Funds CFO: “Clearly, investors are reaching out to managers and asking for live updates or expecting responses in near real time. However, they’re not actually looking for real-time data, but they’re looking for more instantaneous responses to their requests for the data.
“Private equity managers are not in the business of tech development, but they are recognizing the need to be more responsive and to provide more data, and they are thinking about what they can do in-house and what they can outsource to leverage expertise and systems developed elsewhere.”
To meet investors’ needs for frequent and reliable data, CFOs said that further investment in technology is needed. More than 70 percent of CFOs said they expect to expand the skill sets of their in-house finance team to include technology know-how.
12. Predictive analytics
The use of artificial intelligence in fund administration is all about being smarter with data, with many organizations now trying to transition their analytics from being descriptive to forward-looking, according to Jay Cipriano, senior vice-president at SEI Investment Manager Services.
“One of the attractive things about AI is its ability to power predictive analytics,” says Cipriano. “Predictive insights enabled by machine learning could prove to be transformative for many firms, leading to better decisions across a range of functions.”
General partners are looking to combine their asset and investor data with market data to predict future opportunities – it can inform them about what products or funds to offer with expectations of high market demand, anticipate flows that affect their investors and funds, and help them prospect more efficiently, Cipriano adds.
Over time, it will become easier to take advantage of the data that’s available and get the most information out of it. But currently, one of the challenges is gaining access to enough data to develop AI or machine learning.
“By design, most data is kept private within a very small circle of fund managers and investors. To date, it has been very hard to accumulate large amounts of data that one could analyze or try to use in some sort of quantitative investing strategy,” says Cipriano. “As transparency increases and private markets become less private, it is easy to see how AI can become more critical.”
13. Zoom fundraising
The pandemic forced GPs and LPs to adopt new methods for private fundraising. There was arguably an acceleration of a pre-covid trend toward platformization with LPs more likely to commit to established managers with deep relationships and a proven track record.
While many have pointed to virtual fundraises as an indicator of private market resilience, these processes required a great deal more effort to pull off. Early in the pandemic, in May 2020, Private Equity International surveyed 120 GPs with funds larger than $100 million and found that 48 percent of respondents expected to see the final close of their PE fund delayed by more than three months. In late 2020, Neuberger Berman sought delays of four and six months respectively for its NB Strategic Co-Investment Fund IV and NB Private Equity Impact Fund.
Even those who were able to pull off incredible feats of virtual fundraising might not have been able to do so if they hadn’t established relationships with LPs in person before the onset of the pandemic. Take UK-based tech-focused private equity firm Tenzing as an example. In early summer 2020, the firm launched a £400 million ($522 million; €576 million) fundraise and reached final close in just nine weeks without a single face-to-face meeting, at least not during the firm’s roadshow.
“We were astonished at how efficient a fully virtual process could be,” Tenzing head of client services Liz Simpson told Private Equity International in September 2020.
Simpson said 14 of Tenzing’s team members met virtually with 40 LPs in just four and a half weeks. “The combination of Zoom and Slack was hugely powerful,” she said, but she added that “a fully virtual fundraise wouldn’t have been possible without the in-person interaction that preceded it” – only one LP that committed to the firm’s second fund hadn’t met “at least a subset of the team face-to-face prior to committing.”
“We were astonished at how efficient a fully virtual process could be [but it] wouldn’t have been possible without the in-person interaction that preceded it”
If household names in private equity and those with established relationships struggled to fundraise during the pandemic, new managers seeking fresh capital were in for the fight of their lives. Only 11 percent of the respondents to affiliate title Private Equity International’s LP Perspectives Study 2022 said they were more likely to invest with new managers this year.
Wilf Wilkinson, managing partner at Acanthus Advisers, said during an emerging manager conference hosted by Swiss firm Unigestion in November that “emerging manager volumes have broadly stayed flat and shrunk over the last couple of years.” In the end, he said: “There’s no replacement for an in-person meeting when you are backing someone for the first time. You have to meet that person and build trust.”
14. Daily reporting
Changing demands from CFOs means detailed and faster daily reporting is now expected.
According to Navneet Govil, managing partner and CFO of the SoftBank Vision Fund, robotics can streamline various financial and accounting procedures. The aim is to speed up accounting processes, sharpen forecasts and, ultimately, to incorporate predictive possibilities.
Faster processing should allow for deeper insights into trends emerging among portfolio companies. This, in turn, should make it possible to share information about trends across various sectors.
Govil adds that faster handling of information should enable portfolio companies to provide the kind of quarterly guidance now demanded of companies going public. The goal is to move financial reporting from being simply descriptive and towards something prescriptive, and finally to forecasting risks and opportunities.
For Jacolene Otto, head of private equity and real estate at Maitland, the fact that more traditional long-only managers are entering the world of private equity – seen as a more lucrative and higher performing part of asset management – and their demand for faster and more efficient reporting has also meant that those who don’t automate will fall behind.
“That demand to be so fast-paced is definitely driving a lot of automation that, as administrators, we need to look at,” says Otto. Automation also cuts down on staff costs and frees up the fund administrator to focus on more important aspects of the job, she adds.
15. Automated waterfalls
The past two years have seen a marked rise in firms adopting technology for waterfall calculations, according to Private Funds CFO’s Insights Survey 2022, conducted in partnership with TMF Group – but doubters remain.
The share of firms that say they use technology has reached 18 percent, up from just 6 percent two years ago. Another 16 percent report that they plan to adopt technology. “The back-office role is coming into the 21st century,” insists Kwame Lewis, TMF Group’s co-head of fund services for North America. “Doing everything on Excel probably isn’t going to cut it anymore.”
Nevertheless, a resounding two-thirds majority remain steadfast in rejecting automated waterfalls. And yes, a preference for using Excel is listed as the most common reason for avoiding waterfall technology, with many firms considering technology unnecessary or excessively expensive.
“Each waterfall has slight nuances that I think typically work well in Excel,” says one CFO, who explains their firm would be “reluctant to lock in a software solution that may not last long or work well with such nuances.”
Another CFO at a mid-market firm agrees that “when it’s just basic, obvious, plain, simple – and you’ll do it in Excel anyway to double check it – [a technology investment] doesn’t really justify the cost.” The source adds that “the more complex the waterfall gets, the more risk there would be of paying carry too early or too late.”