Information is power. And nowhere is this truer than in private markets where thousands of institutions move billions every week into and out of buyouts, carveouts, recapitalizations and spinoffs.

New York-based StepStone, which last year alone placed about $50 billion in private deals, has an important position in this exclusive club, offering institutions both custom and fund of funds services.

It has used its access to build a network of data and analytics that have become wired into StepStone’s entire workflow. That network, which tracks 57,000 companies, 75,000 funds and 14,000 fund managers, can put material information into the hands those best positioned to use it in the private equity market—either StepStone or its clients. The system is called StepStone Private Intelligence, or SPI; it is part of a system of analytics that StepStone believes gives it a competitive advantage, alongside proprietary programs.

SPI is a main reason why Bob Long, chief executive of Conversus, a subsidiary of StepStone, believes that he and his managers can get the Conversus StepStone Private Markets Fund, a registered ’40 Act vehicle launched in October last year, to be self-funding in a few years. “I know it can be done. We’re already achieved self-funding in the most recent quarter,” Long says. “We like to think of our database as the Bloomberg of private markets. It’s probably the most comprehensive one out there.”

Bob Long

The fact that SPI data “allows us to predict when capital calls are going to occur, when a liquidity event is going to occur is really, really important,” he adds.

Cutting cash drag

Running a tender offer ’40 Act fund that makes investments in illiquid assets, like CPRIM, inevitably means cash drag. Investor money — all of it — is generally put into the fund at the moment they commit to investing in it. Liquidity sleeves structured into ’40 Act funds mean managers can put that money into easily tradable securities like, say, commercial paper, but those investments don’t pull in the ‘illiquidity premium’ investors in assets like private equity come for.

StepStone analytics allow Long and CPRIM portfolio managers to forecast cashflows of the funds they invest in so accurately that, combined with organic liquidity, managers can drastically reduce cash drag, says Long.

There are few who would dare make such a claim these days. Most of the private markets funds Private Funds CFO studied are aiming to maintain a liquidity sleeve of around 20 percent of net assets to cover unexpected redemptions, or capital calls, with credit lines as backups.

“Reducing cash drag is the holy grail for PE fund managers,” says Sameer Shalaby, CEO of Hazeltree, a New York-based treasury management software company for private funds.  “It is not easy to do, but it can make a real difference in performance. It requires being able to forecast cash needs of the portfolio companies, the pipeline of fund investments, and expenses and handling credit lines in a way that leaves cash balances as low as possible. All too often we find that back-office systems don’t link with front office to provide an integrated view. But companies who solve this problem will enjoy a real advantage.”

Long, whose CPRIM fund also has a credit line, aims not to use his. He says that with SPI, his team can achieve self-funding by carefully monitoring the cash flow mix, the same way a good cook puts ingredients in a pot to improve the taste. Says Long: “It’s like making a stew. You must know how much of an ingredient to add, and how it’s going to affect the mix. But you also must have a vast flow of ingredients, or opportunities that StepStone provides.”

Advanced tech systems

SPI and other proprietary StepStone programs like OMNI and Pacing give CPRIM managers Tom Keck and Mike Elio the ability to examine the cashflow profiles of each investment to determine how they will affect the overall blend of the 400 private market investments in the pot.

Since its founding in 2007, StepStone has poured money and brainpower into building a top-notch data and analytics array to back its bespoke separately managed accounts and fund of fund services. The data science and engineering groups consists of 30 staffers.

Fuel for SPI’s analytics engine is the information StepStone acquires through its role as gatekeeper for the institutions it serves. All this information gets poured into structured query language (SQL, or ‘sequel’) databases that are able to communicate with each other. This way the data can easily be retrieved, remixed and stored.

Tom Sittema

Its speed and ease allow technicians to design newer and sharper insights into private markets where there is so little standardization.

“Early on we found that the off-the-shelf programs wouldn’t work. So, we spent a lot of time and money building our own system, and our own tools,” says Sam Scherf, co-head of data science and engineering at StepStone.

Added to the SQL database was the programming language Python, which allows data analysts  to conduct complex statistical calculations, create data visualizations, build machine learning algorithms, manipulate and analyze data and complete other data-related tasks such as bar graphs, pie charts, histograms and 3D plots. Python libraries also help technicians quickly write programs for data analysis and machine learning.  “We rely on Python so much, that for data science roles we won’t even look at a job application unless the person is fluent in Python,” says Tyler Johnson, co-head of data science and engineering. “It’s that important.”

Samuel Scherf

StepStone’s data and analytics team has built a database that is among the most comprehensive in the private markets. “But it’s not enough to build and feed a system,” Scherf says. You have to have an investment team that appreciates it, and actually uses it.”

“Having the ability to quickly assess the opportunities, determine the effect of new investments on the mix and quickly deploy the capital is critical to eliminating cash drag,” says Tom Sittema, Conversus’ executive chairman. “The advanced analytics we believe will be critical to our success.”

Sittema equated the development of private markets to the early development of real estate investment trusts, where the market tried several unsuccessful forms before becoming widely accepted as it is today.

Feeding the system

SPI’s system has been literally wired into the DNA of StepStone’s worldwide organization of 526 employees. Modernizing the work habits of hundreds of StepStone employees required systemwide discipline, says Long.

For StepStone’s culture it meant all presenters had to abandon the paper world of briefcases, excel spreadsheets, emails and filing cabinets, in favor of tablets and one electronic online brain.

No more work offline for presenting staff. All the work product at StepStone – or most of it – gets put into the electronic workflow.

Now, says Johnson, StepStone reps operate almost totally online, feeding the network with the latest developments. What you get is an electronic brain capable of moving insight at light speed.

Last year alone StepStone reps attended about 4,000 high level investor meetings, mostly online thanks to covid. Each meeting produced notes that were fed into the computer and distributed across the SPI network to teams that might best be able to use the information. Liquidity events could include early warnings about spin offs, carve outs, and mergers of all types.

Tyler Johnson

The system is self-policing. If attendees fail to submit timely meeting reports, the system automatically pings their colleagues to prod for the entries. The speed and responsiveness of the system has converted many paper-bound skeptics to the online approach, says Scherf.

As StepStone has grown to $465 billion of assets under advisement and management, so has the database. There has been real momentum in the last two years, says Johnson.

Now SPI has hundreds of thousands of reports entered in the database. And it can parse that information in numerous ways by sponsor, sector, and vintage year. What’s more, they even can drill down to deal authorship.

Here is where the predictive insights can come. Maybe a fund sponsor has lost its savviest dealmaker, who struck out on her own. SPI can use the attributed deal data to estimate the executive’s chances of succeeding. This way, StepStone can decide whether to buy or pass on the executive’s new fund offering. Similarly, StepStone can estimate the sponsor’s ability to produce outsize returns without their top dealmaker.

Based on the law of large numbers, the bigger the database becomes, the more accurate its predictions about event timing – such as when funds will call capital and distribute proceeds – will be.

The secondaries edge

Data in the private equity market is jealously guarded – famously so. Information contained, for example, in due diligence questionnaires, routinely filled out by GPs for prospective limited partners, is normally contained in secure data rooms.

Yet GPs are only too willing to share information with a firm like StepStone – which ranks itself among the world’s top five capital allocators – that can give them access to clients eager to invest new money in new private equity deals. Such proper incentivization not only gives StepStone access to information, but also permission, even encouragement, for a StepStone client to trade in the growing secondary market. GP sponsors maintain strict control over who can trade limited partnership interests in their existing funds. They might favor a secondary investor willing to promise primary capital in the next fund.

According to Conversus: “GPs must provide their formal consent to each transfer, so they are highly incented to favor buyers, who regularly commit substantial capital to the GP’s new funds.”

For managers of such ’40 Act funds, favorable access to PE secondaries and co-investments can be a critical factor to overcoming cash drag, as they allow capital commitments to be deployed more quickly into investments.  At the same time, secondaries and co-investments can also offer relatively lower fees and more visibility into the underlying portfolio companies at time of investment.

The secondaries market now represents an important place for funds to invest retail dollars. Between 2005 and 2019 secondaries have grown into a $100 billion market, from about $10 billion. Secondary investments offer investors a chance at tapping an estimated $3.7 trillion in unrealized value, StepStone estimates.

Access to mature secondaries, funds that have made their capital calls and are closer to the harvest stage, can boost performance in the early years of development for a close-ended registered investment company like CPRIM.

For fund managers, secondaries offer the ability of knowing where the money is going. Before buying an LP interest, secondary managers can see how the investment is doing. Investing in a primary fund contains a certain amount of blind pool risk, because the capital is undeployed. Secondaries can provide a new fund with instant diversification across vintage year, strategy, industry, sector, and fund manager.

Meanwhile, StepStone continues to build on SPI’s success, allowing its clients to access data for a fee and using advanced analytics to expand relationships. In the last three years StepStone’s engineers have devised OMNI, a portfolio monitoring system that tracks investment across the client base in real time. And more recently, StepStone launched PACING – more of a cashflow forecasting model for portfolios. Thus, StepStone has evolved a suite of analytics that covers the entire life of an investment.

“What we are seeing here are the fruits of a purpose-built system that have only come to bear in recent years,” says Long.

CPRIM launched with $35 million on October 1 last year. Since then, the fund has grown to $100 million. From its launch to end of July this year, it’s return was 52 percent.