This article is sponsored by PEF Services
Fund performance will always be of primary importance to LPs, but most GPs in the market realize that they still need to match that performance with world-class servicing, especially given how competitive the private capital market has become. The vast sums of capital raised for alternative assets might obscure the fact that LPs’ expectations are rising right along with them, so gone are the days when any firm’s returns can excuse a clumsy investor portal or quarterly reports that consist of a single PDF.
According to the CEO of PEF Services, Anne Anquillare, any hiccup in servicing can haunt a firm, with such critiques not being shared with the GP until the next fundraise, when it’s often too late to address the issues. She’s not calling for GPs to spend more, but to spend wisely by keeping the LP’s priorities in mind, knowing and meeting new and changing standards, and prioritizing upgrades.
If that sounds like a tall order, it is, but there are plenty of resources, in terms of both service providers and available technology, for doing so. Still, there’s no avoiding the fact that the LP of the future won’t have to choose between a high-performing fund and one that’s responsive to their unique needs.
The private capital industry has been touting ‘the new, more sophisticated LP’ for several years now, stressing their demands for greater transparency. How is today’s investor any different than the one from seven years ago?
It’s true, we’ve been talking about the same trends for a while now, but they are intensifying, especially when it comes to competition for commitments. The big players will still get capital due to their brand names and ‘safety,’ meaning no one will get fired for committing to a large global investment firm. But middle-market players and especially emerging managers are finding it increasingly difficult to differentiate, even though by the numbers, they provide opportunity for stronger performance and the next generation of big players for investors.
Covid has paused this, but as we re-open, the competition will be as fierce as ever, so we’re reaching a tipping point where every GP will have to find a way to truly satisfy an investors’ diligence and reporting. The quality of a GP’s communication with its LPs has become a key differentiator and a powerful factor in the decision to invest, especially for investors new to a firm. GPs that can demonstrate how they’ll be reporting on a consistent basis to investors is one of the easier ways to build trust with new LPs.
But these demands aren’t coming from nowhere. What’s driving LPs?
Let’s face it, extreme volatility and stress on an industry tends to bring weaknesses to the forefront. And this past year has been extreme. All types of LPs are trying to figure out how to continue to commit to the private capital industry and not be fired for it. And every Wall Street Journal piece on an SEC investigation or some other scandal only makes them more cautious, especially when committing to new managers. The types of LPs are expanding as well to include wealth managers bringing in multiple clients to a private capital firm, smaller foreign investors, and emerging manager fund-of-funds are back.
Today’s investors are struggling to balance their own priorities. LPs want access to the alpha private capital provides, but they also want to make sure they are being good ‘fiduciaries,’ officially or unofficially. This means more through operational due diligence, increased expectations for use of industry standards and overall access to investor data. Investors are comparing reporting not just among private capital firms, but also across other investment assets. GPs shouldn’t be shocked if even that local family office starts asking for a dashboard view of their data.
As a fund services provider, how can GPs make the most of what firms like yours offer?
It used to be that GPs’ attitude about the back office was ‘if it’s not broken, don’t fix it.’ But the reality is, GPs won’t know it’s broken until it’s too late. An LP might not share their disappointment or frustration until the next fundraising. We stress to our clients that silence doesn’t always mean satisfaction. Think about the Morningstar report, with return and expense ratio information, information on major holdings and the like, so that investors can easily compare one fund to another. Private capital portals need to move in this direction, with that kind of data and metrics.
Now, it’s very difficult for an individual GP to create and maintain the technology required to capture the data, display the data in a thoughtful, creative user interface, and maintain those systems in a secure environment. It’s not that GPs aren’t willing to invest in this, but it’s difficult to know how best to spend time and resources. We’ll have clients walk away from their costly IT implementation projects in frustration to move over to our platform, where they get the ease of plug-and-play use for a single annual fee.
When a GP selects a fund administrator, it needs to be in the context of the entirety of the firm’s operations. Internally, we talk a lot about the ‘vendor ecosystem’ of our clients; it’s not just the fund administrator, it’s the auditor, tax, compliance and IT. A lot has to be done by third parties for any private capital manager to be a success.
If the firm is struggling with any one vendor, it can impact the rest. So that’s why we talk about a comprehensive roadmap, and since no manager can tackle everything at once, it’s vital to prioritize certain initiatives. We can help, but only if we’re part of a shared roadmap with the client and their other vendors, where we’re all aligned.
Let’s talk specifics. What should be on a GP’s roadmap this year and next?
Fees and expenses are a consistent area of struggle and mistrust. All asset classes have had their challenges in reporting these to investors. GIPS® (Global Investment Performance Standards®) has solved this for all other assets classes and now it can solve it for private capital. And while it is more commonly used when a firm is fundraising, it – or at least portions of it – should become a consistent part of ongoing reporting to investors.
GIPS® and enhanced reporting can help private capital close the gap on fees and expenses reporting efficiently. Good rule of thumb: in general, but certainly for first-party fees and expenses, provide enough information so each investors could recalculate, or at least perform a sanity check.
And if GIPS® seems excessive, remember that the LP has to show up to their board and explain why private capital is the only asset class that can “skip” that, for no reason other than they always have. Managers that can put themselves in the shoes of the LP will build a better back office, choosing the vendors, technology and processes that will only strengthen the relationship with investors, and make it more durable for whatever the future brings.