(Re)building trust between GPs & LPs: navigating a murky data world
It is no secret that the private equity industry continues to endure a lack of alignment, transparency and standardization when …
As we slowly approach a year into the COVID-19 crisis, it’s no surprise that we are all living with a new level of uncertainty about what’s to come. You’d be hard-pressed to find a person, region or industry that hasn’t been affected in some way, and private markets alike will not easily evade the consequences. In times like these, it is ever more critical for investors to have greater transparency and data access regarding their portfolios.
On the eve of the new eFront Insight Research module launch, we spoke with James Smallwood, Director and Head of Content – Insight at BlackRock, to learn how private market investors can use technology to assess the impact downturns might have on their portfolio.
The ongoing COVID-19 pandemic is the first major global crisis that we have had to contend with since the 2007-08 Global Financial Crisis. During the GFC, it became evident that investors faced a distinct lack of transparency when it came to their portfolio holdings. At a moment when it was crucial for Limited Partners to identify how the GFC would impact their portfolios, such as exposure to specific industries and geographies, there was insufficient information to do so.
This revelation led to an advancement in financial technology products, such as eFront Insight, which focused on sourcing granular information around underlying holdings within indirect investments to provide passive investors with a clearer picture of their investments. As a result, LPs who have adopted Insight Data Services, or similar offerings, have been able to carefully monitor and rebalance their portfolio, hedge against devaluations, and ultimately mitigate risk.
In addition to understanding their own exposure, investors benefit from having access to information about the broader private market. Through the nature of private market reporting and valuations, there is a significant lag in terms of up-to-date information being made available. To predict the impact of a downturn, the obvious place to turn is historical events and public markets. Having access to a broad universe of private market benchmarks alongside historical public market prices, with a tool that allows investors to analyze the data, enables Limited Partners to identify a potential path through the crisis.
Private market investors require a ‘suite’ of information to properly assess the current situation. They not only need to understand what is contained in their portfolio but also have access to public market indices and a private market benchmark. With this information, they can better understand the impacts the downturn can have on their portfolio, what the broader private market implications are, and assess the behavior of public markets to indicate the likely direction of the portfolio’s valuation.
Through access to a historical private market data set, investors can identify trends that occurred during past crises and provide insights around the potential route to take through the current crisis.
For example, in the 2008 GFC, we saw a significant downturn in distributions (funds exiting companies), and a rapid increase in capital calls (funds adding to or making new investments). This movement created a liquidity problem for investors who relied on the pacing of cash flows and distributions to settle those capital commitments. With large amounts of dry powder (capital committed but not called) in the industry, there is potential for fund managers to be able to rapidly call large amounts of capital to support struggling investments and to invest in companies with favorable valuation conditions.
Similarly, private markets offered downside protection to investors when compared with public markets during the downturn and provided close correlation to public markets during bull periods. With the current strength of technology stocks that address the ‘new normal’, will we see VC valuations uptick significantly?
Although past crises can’t precisely predict what will occur in a future crisis, looking at similar past events can give an idea of what might happen. Our recent report generated out of Insight’s Research platform looked at private markets in downturns and how previous outcomes can help navigate the current COVID-19 climate.
The Insight platform provides our clients with the full suite of data they require to understand how and why their portfolio is performing a certain way, with access to granular information on their investments delivered by our team of analysts. The portfolio view is enriched with a universe of private market cashflows and public indices, and delivered into our cloud solution. The data is then parsed through our calculation engine and exposed via a suite of analytics that enables our clients to thoroughly examine the data across various dimensions, including sectors, geographies and strategies.
Using Insight’s Research module, our clients can directly examine their own investments and private markets as a whole both today and throughout history. This combination of data and tools provides our clients with a detailed understanding of how previous crises and trends have historically impacted the market and their portfolio, ultimately providing essential fact-based support and guidance through the decision-making process within their investment lifecycle.
The launch of Insight’s Research module is the first of many upcoming feature releases within the Insight platform aimed at giving private market investors access to new data and perspectives on their current and future portfolios.