The relationship between limited partners and general partners, like most relationships, is fraught with complexity, nuance and the need to balance interests that do not always align naturally. Social scientists would define the misalignment of interests as conflict. However, in the context of private equity and alternative investments, balancing GP and LP interests has become, through increased regulation and new technologies, largely a matter of transparency and communication. New regulations aimed at controlling systemic risk and the growing demands of LPs seeking a more informed view of how their investments are managed have combined to create an unprecedented reporting burden on GPs. A variety of technologies have been introduced to deal with that burden, each restoring some measure of balance to the relationship until the demands for even more data surpass its capabilities. Now, this process has culminated in the development of advanced information portals.
Transparency drives information demand
The dual challenges described above have driven GPs from their more traditional performance-is-all-that-matters approach. Increasingly, GPs are moving toward openness and complete transparency in order to enhance and protect their relationships with their LPs. They seek ever more efficient and effective means for providing not only greater amounts of data, but more detailed information.
For their part, LPs are becoming ever more sophisticated consumers of GP-provided data, typified by their increasing utilization of benchmarking, forecasting and portfolio analysis software. That has not only enabled better usage of information, but also results in demands for even greater amounts of information with even greater detail. This positive feedback-loop can be described as a maturity curve, which the flow of information between GPs and LPs naturally follows.
The natural goal for GPs is to build a more ‘sticky’ relationship with investment managers. That is, by improving the service they deliver to their LPs with better access to better data, GPs seek to strengthen that relationship and bind the parties together with ties of trust and responsiveness. This presents a challenge to GPs in that LPs’ demands for greater transparency is paired with demands for data customized for the IT systems and analysis requirements of different investment managers. This results in GPs needing to organize and reorganize the same data repeatedly for different clients. Although the periodic delivery of specialized reports in PDF files used to suffice, that process now looks dated, as well as being slow and labor intensive.
Smarter portals reduce workloads and increase transparency
GPs, especially the larger ones with greater resources, are building customized web portals to provide greater service to their investors. These portals provide LPs with the flexibility to analyze investment information from various perspectives, via dynamic navigation within funds, drill-down, filtering and exporting capabilities. Portals also allow GPs to pay greater attention to user experiences and are often combined with access to third-party content, such as news, videos, and analysis.
Now, a new generation of portals is being developed that will replace the old one with even greater sophistication and better integration with the IT systems of both parties. Arguably, the greatest benefit provided by the next-generation portals is the capabilities to let users easily and quickly organize their own data in ways that best suit their own special needs, as well customize the interface. The largest GPs are investing heavily in this trend.
The advantages of the new generation of portals will push firms with older portals to upgrade in order to remain competitive. This poses a particular challenge for smaller firms with limited resources. Fortunately, solution providers are beginning to respond with SaaS and cloud-based products that offer flexibility, scalability, affordability, easy integration and low cost implementation. Solutions like this represent the current state-of-the-art in data communication and transparency, while effectively reducing the workload associated with massive amounts of data for both sides of the private equity relationship.
Eric Bernstein is chief operating officer (North America) at eFront, a private equity software provider.