The edge in private equity investor relations: leveraging technology

Nikolaos Perros, head of private equity services at Citco Fund Services (USA) Inc, on why it's sink or swim for GPs leveraging technology to meet a host of new challenges in private equity.

It is no secret that the private equity industry is currently the darling of the alternative investment universe. The surge in institutional demand for private equity has been spurred on by impressive performance, compounded even further by a renewed appreciation for the diversification benefits alternatives provide. Investors continue to seek solutions for both unattractive fixed income yields and unpredictable equity market volatility, both of which have been exacerbated by the pandemic.

Preqin predicts that while alternative assets will swell 61 percent to approximately $17.2 trillion globally by 2025, private equity will be the biggest winner, with assets doubling to $9.1 trillion globally.

However, this rise in demand has been coupled with intensifying investor scrutiny during the allocation process. GPs cannot simply expect to gain more commitments as a result of this increased demand without adapting their processes to meet the requirements of institutional LPs. On the contrary, GPs must realize that the digitalization of the investor relations function is imperative for asset raising and successful investments into subsequent fund vintages. Put even more simply, those that fail to swim will indeed sink.

Take, for example, the mindset change that has accompanied the adoption of virtual investor due diligence, where institutional investors’ initial resistance and lack of comfort with virtual investor due diligence had a meaningful impact on funds being able to launch and successfully close. Furthermore, the cancellation of conferences and roundtables has made networking with prospective investors a formidable challenge – especially when considering that allocators are increasingly getting burned out on virtual events and scaling back their participation. To cap it all off, the inflows we are seeing are largely institutional dollars, which come with the most complex and demanding governance and reporting transparency requirements. Should a GP even advance to late-stage conversations with a new institutional prospect, getting LPs to commit capital may be harder than ever.

Digital streamlining

To address these challenges, GPs would be wise to ensure that their digital workflows are comprehensive. In fact, managers are now waking up to the fact that this is not just best practice, but a critical requirement. Many investors today are still operating in an email-dominated investor relations workflow. Both lead to bottlenecked proceedings and inefficient workflows, which in turn create vulnerabilities to human error, tardiness and subsequently dissatisfied LPs. Meanwhile, the tech-enabled IR solutions being utilized by the majority of today’s GPs are born out of an institutional desire for investor-friendly, efficient and streamlined onboarding and reporting processes, while also paying heed to the importance of cybersecurity. These solutions can improve capital raising, reporting, digitized initial subscription documentation (including multilayer authorization and e-signatures), embedded analytics and security measures via airtight data rooms—as well as significantly increasing the overall speed of execution.

Asset servicers have been witnessing first-hand the major impact these solutions have had on the alternatives industry, both before and during covid-19. With managers and investors alike requiring access to real-time data “on the go,” the alignment of front-end technology and elimination of antiquated information exchange is of the upmost importance, as it leads to less errors, more straight-through processing and quicker turnaround times. The elimination of email, in particular, is an essential point. Covid-19 has been a unique case study into how unreliable and insecure it can be, and the industry is reaching a consensus that it cannot continue. Instead, both managers and investors are clamoring for highly structured and protected IR tools for accurate, secure, and real-time information exchange that help maintain confidence in the LP/GP relationship.

All in all, GPs are today facing a double-edged sword of strong institutional demand for their asset class, combined with never-before-seen obstacles to winning and maintaining mandates. The industry is subsequently witnessing a stark bifurcation in asset flows between those who embrace the digitization of the investor experience and those who rely on manual processes.

Managers should look to their asset servicers to provide technology solutions that improve LP communication and allow for the secure, transparent and efficient processing of investor commitments. Certainly, those who have digitally transformed their operating models are reaping the benefits.