The data management balancing act

It wasn’t too long ago that private equity reporting amounted to sharing a PDF document with headline fund and portfolio company information once a quarter. But as investor allocations to the asset class have mushroomed, LPs have increased their requests for the provision of granular information on portfolio companies’ operating performance, fund finances and, more recently, ESG and sustainability metrics – and at a far greater pace than ever before.

This dynamic has transformed the way private equity managers are thinking about how they collect and manage data, with firms now under more pressure than ever to increase the amount of data they produce in order to meet constantly rising expectations for detailed, frequent LP reporting.

Challenging transformation

Upscaling data infrastructure to meet increasing LP demands at the required pace has proven challenging for private equity firms.

Pulling together large volumes of disparate data from multiple funds and portfolio companies – often held in myriad spreadsheets, emails, accounting systems and customer resource management platforms – has proven especially complex.

“The nature of private equity investing involves a pretty diverse data network, as data from all portfolio companies has to be aggregated and normalized into a single location,” says Melissa Ferraz, managing director and global head of Aladdin Alternatives at BlackRock.

“There is a governance process that has to be put in place to deliver that, and it does place an additional operational burden on fund managers.”

In a 2022 survey of more than 150 private capital firms conducted by Intertrust and Everest Group, 75 percent of respondents highlighted the inability to consolidate siloed business systems as a major business challenge, with 53 percent citing data management issues as one of their top three technological challenges.

“Data sources remain fragmented, and it is challenging for fund managers to get a handle on their own data and harness it both for internal decision-making and reporting to investors,” Ferraz says.

James Gow, markets managing director at fund services provider Aztec Group, adds that confidence in the “reliability, completeness and freshness of data and its sources” remains a “fundamental challenge,” with the same going for the “technological limitations in holding and extracting data.”

Another area of concern for GPs is the accuracy and quality of external data used for benchmarking and investment decisions. The increasing volume of ESG reporting is also particularly difficult to get a grip on, many say.

“There is a continual trend towards more outsourcing, but there is still constant education required”

Melissa Ferraz
BlackRock

Aztec Group’s head of innovation, Tom Bennett, says: “With the recent arrival of the Sustainable Finance Disclosure Regulation and the need, from June 2023, to report funds’ Principal Adverse Impact indicators – not to mention a general shift in mindset when it comes to ESG and sustainable investing – GPs are having to rethink how they’ll collect the necessary ESG data from their portfolio companies, and report to investors.”

Gow adds that ESG reporting can be a challenge for managers “in large part because of a lack of consistent metrics, reliable data and standardized reporting frameworks.”

New models

The processes and technological capabilities required to manage data to the highest standards continue to expand and have become more complex and resource-intensive. According to Vera Huang, sales director for data services at fund services group IQ-EQ, this has resulted in GPs becoming increasingly reliant on third-party specialists.

Many managers already outsource basic accounting and reporting tasks, but Huang sees these traditional outsourcing arrangements evolving into “co-sourcing” partnerships.

Closer alignment between service providers and managers is also anticipated, with GPs looking to service providers to handle lower-value tasks such as data collection, aggregation and storage, and free up GP resources to focus on the core business of investing and making returns.

Aztec’s Gow adds that the “clear direction of travel” is toward service providers curating the infrastructure and technology required to produce secure, centralized data that managers can use for high-value investor interaction and dealmaking as and when required.
“Service providers need to provide ease of access and self-service so clients can get better access to high-quality data securely and in near real time,” Gow says.

Building trust

Outsourcing the management of mission-critical data to third parties, however, puts managers outside of their comfort zones, and firms are still feeling out what to outsource and what to keep in-house. More than half of respondents in Intertrust’s survey ranked “achieving an optimal outsourcing mix” as one of the top two priorities in their organizations.

“There is a continual trend toward more outsourcing, but there is still constant education required,” BlackRock’s Ferraz says. “Deal teams have historically wanted to hold on to their data as tightly as possible and it takes time to build trust and give deal teams the confidence to let go a bit and focus on the core responsibility of sourcing deals, operating portfolios and delivering value and returns.”

Huang says: “It is incumbent on service providers to win GP trust and show that they have the experience and expertise to deliver value for the GP by automating and digitizing the collection, analysis and distribution of data.”

Looking ahead

This caution notwithstanding, outsourcing is expected to become increasingly important for GPs to keep pace with technology and data science.

Ferraz expects to see data and analytics push risk management up the private markets agenda and align with trends in public markets. Managers and investors will also increasingly leverage technology to “compare exposure in both public and private markets” and stress-test portfolios based on various market scenarios, she says.

Gow predicts that the democratization and personalization of data in private markets will also become “increasingly pervasive” in the next few years and notes a rapid acceleration in interest and available technology for the application of generative artificial intelligence in private markets.

As automation continues its rapid pace of evolution, it will likely be a key driver of efficiency in processing distributions, payments and invoicing, as well as easing regulatory and compliance burens by facilitating seamless data sharing with regulators and clients.
“Firms will be looking to their service providers to bring this to bear, but also make smart choices in tech that will be sustainable past the early wave of new entrants,” Gow says.