Imagine being immediately able to flag an LP as a good prospect, or work out – and keep track of – why it turned down your previous fund. Fundraising and operations can be made more efficient by using data to track LP behavior, leads or opportunities.
Although increased information requests from LPs are partly driving the trend, it is GPs that are really starting to recognize the potential of big data.
“Forward-looking firms are the ones that realize that there is a lot of data in their operations; they just need to do a better job of capturing it,” Kevin Kelly, chief executive and co-founder of private equity software solutions provider Altvia, tells pfm.
“Fund managers are starting to realize that they do not only need to be in front of LPs more frequently with more information at hand, but they also need to be more targeted to make sure that their efforts are targeted at LPs that are their ideal prospects,” Kelly adds.
And this trend is only going to become more widespread, says Jim Strang, managing director at alternative investment management firm Hamilton Lane. “The use of data in regards to fundraising is becoming more and more prevalent,” says Strang. “This trend is set to continue and in the future there is going to be better data and people are going to use it to drive decision-making.”
Hamilton Lane is not the only firm using data to support business decisions. Since its inception, asset management firm Adveq has used data and analytics to drive the firm’s decision-making, Nils Rode, managing director and co-chief investment officer at Adveq, tells pfm.
The firm is using data on a day-to-day basis in some departments, especially during investment management and areas like risk mitigation.
“There are many stages in [the] investment management process where you need to get knowledge and insights from huge amounts of data,” says Rode. “In the past, much of this was done by investment managers, and to a large degree continues to be done by them, but of course if you have such new tools then you are able to do much more than was possible previously.”
Adveq works with financial institutions such as pension funds, insurance companies, family offices and asset managers in Europe, North America and Asia-Pacific to target private equity opportunities globally. The firm is therefore required to sift through thousands of potential investment opportunities for its clients.
“There are millions of data points that can be collected from the universe of investment opportunities. There are thousands of fund managers, hundreds of thousands of companies that are either existing or potential investments. There is also information changing on a monthly or quarterly basis. You can only go so far to get through this sea of data manually, regardless of how many investment managers a firm has,” says Rode.
LPs are also using data as a resource management tool, says Strang. The information can be used to drive decisions around allocations and to help understand the market itself, including through peer analysis and cashflow forecasting. LPs can use data at the individual investment level to determine benchmarks around fund performance, he adds.
But staff at LPs and GPs should not be too worried about their continued relevance in this new data-driven world.
“Data and analytics are excellent at telling you exactly what factually happened but only helpful to a limited degree about what is going to happen,” Strang says. “That’s where judgment and industry and market expertise comes into play.”
Stuck in the Dark Ages
The rigorous data-reporting requirements of alternative fund regulation also presents the industry with the perfect opportunity to modernize, according to an industry expert.
“It’s bizarre that in 2016 we face the problem of data being stored in different places, and in different jurisdictions, that just don’t talk to each other,” says Tim Andrews, director of The ID Register, a due diligence technology provider.
He acknowledges the costs of complying with a wide variety of regulations like the EU’s anti-money laundering Know Your Customer legislation, the Alternative Investment Fund Managers Directive and the base erosion and profits shifting guidelines, but argues these are an opportunity to change the way things are done.
“The solution isn’t to use pens and paper; we’re still conducting reporting as if it’s 1985,” he says. “This is a real opportunity for the industry to come together and create a standardized solution using technology.”
This isn’t something that should be done at a firm level; rather, the industry should work together to create a standardized way of reporting and presenting data, he adds.
Regulators must also play their part, ensuring frameworks allow for reporting to move forward and for the industry to set the standards, Andrews says, adding that some are beginning to update their operations to allow firms to use technology.
“In the past the Guernsey and Jersey regulators required extensive paperwork from firms when reporting on their KYC compliance.
“They have now updated their handbooks and allow for electronic submission of due diligence documents.”