Investors are becoming increasingly data-hungry and technology-savvy. They are demanding more data, more detail and more transparency and they want that information delivered in a very specific way. Not only that, they also want malleable data, so they can drill down to individual assets’ performance, and compare it with external market benchmarks.
It remains a challenge for fund managers, and not all back-office tools are up to the task. But more efficient and intuitive technology has developed in recent years and GPs have gradually begun adopting these solutions.
Investor demand for improved data sets is a key driver of many firms’ technology investment. One-third of CFOs surveyed recently by EY say they plan to focus on building an investor portal over the coming two years – compared with 25 percent that will be turning their attention to regulatory reporting software – while 40 percent of the participants have spent money in this area in the past two years.
The nature of these portals and reporting tools varies. In an ideal world, firms would be able to use a universal, off-the-shelf technology solution. Standardized reporting technology is sought-after by fund managers and investors alike; speaking at January’s PEI CFOs and CCOs Forum, one chief financial officer said: “LPs have 300 passwords, logging in separately for different managers’ data. It has to stop.”
A member of the Institutional Limited Partners Association added it was easier with fax machines because he had just one place to go. “Now it’s much more complex.”
But the intricacies of private equity fund data mean a universal, ready-made product is unlikely to materialize soon. Instead managers have to do their research and adapt the technology systems available to meet the specific requirements of their firm.
A tool that easily connects investors with managers is a good place to start, Graeme Faulds, director of private equity solutions at eVestment, tells pfm. He co-created TopQ, a web-based GP performance analyzer that enables private equity performance data to be exchanged between fund managers and investors.
“TopQ acts as a data clearing warehouse between investors and managers. Fund managers can respond to clients, and share their data through the platforms. We have this saying that it allows clients to spend more time performing analysis than preparing analysis. I spent 15 years on the investment side in private equity, so TopQ is very much a tool formed for investors by investors,” he says.
This sentiment is shared by Matthew DeMatteis, director of research at the ILPA.
“I think there needs to be better connectivity between LPs and their managers. What we’ve been establishing is the AltExchange Data Standard, which enables a seamless transmission of information between LP and GP accounting systems. Currently, this transmission of information is highly manual, so an automated solution would bring significant efficiencies,” he says.
The AltExchange Data Standard is a web platform which streamlines the sharing of information between fund managers, investors and other parties. It includes data such as portfolio company financials, investor organizations and contacts, fund formation, cashflows and capital accounts among others.
Aside from producing the data standards, ILPA has formed partnerships with reporting and data software vendors, providing exclusive usage deals for its members in a bid to improve data transparency for its investor members.
“From our perspective, we’re all about empowering LPs and helping them perform their duties better. In addition to our internal efforts, we’re aiming to give them access to multiple tools and tech vendors, so they can choose the provider that best fits them. We have around 10 or so relationships and we’re hoping to announce the growth of that over the next couple of months,” DeMatteis says.
Private equity is an asset class that has a high demand for monitoring different metrics, but the private nature of the industry makes it a little bit harder to do that.
“The tech community is really trying to address those challenges,” DeMatteis says.
It is clear investor pressure plays a big part in a firm’s decision to adopt new technology. But firms have their own reporting issues and technology could improve internal efficiency, which will also have a knock-on effect on the service they provide to clients.
“Technology provides GPs with more visibility into their portfolio companies, making them better managers. All of this data and technology allows them to report to LPs in a more efficient and detailed manner,” says DeMatteis.
Technology can also help managers respond to the increase in queries about their track record.
“They need a better system to analyze and report,” says Faulds.
While technology can increase efficiency and improve the GP-LP relationship, it does bring with it fresh risk for both parties. Firstly, providers have had to reassure LPs and GPs that reporting software, and the data it contains, is secure.
Cybersecurity breaches are more often caused by employees mistakenly clicking on malicious links or not storing sensitive information securely than grand-scale hacking exercises. New LP reporting software needs to account for this, says Michael Halloran, chief executive of NES Financial, a US fund administration software firm.
“Human error is often the source of quality issues and potentially a cyber breach. This requires firms to thoroughly understand their vulnerabilities, what processes can be automated and what practices need to be implemented to prevent intrusions or mistakes.
GPs also have concerns about slow software installation processes. “By leveraging both our domain expertise and integrated technology platform, we on-boarded three funds with 485 investors in 30 days,” Halloran says of one of NES’s solutions.
“[The system] was able to more efficiently meet regulatory and investor reporting demands, improve accuracy, timeliness, and increase scalability as they continued to fund at an accelerated rate,” he adds.
Tech solutions are proving to be a worthwhile investment, as they can upgrade the investor reporting process for GPs and their clients. But all technology is not created equal. Only when private equity firms understand what investors want from reporting – certain types of data, deal-by-deal information, centralized data portals – can they begin using tech to their advantage.
But buyer beware: reporting technology exposes firms to a higher level of LP scrutiny. With no rewind feature on the digital age, firms must be prepared for better informed investors