Who’s in your Top Ten? – LP demands push decile rankings
Deciles and quartile …
Technology has been a revolutionary force in many industries including finance. Technology has disrupted the payment industry, stock trading and retail banking to name just a few. While technological innovations may seem like a threat to existing established industry players when they initially occur, over the long run they almost systematically clearly and largely benefit those industries and contribute to their growth and prosperity, says Thibaut de Laval, Chief Strategy and Marketing Officer at eFront, although it is early adopters who tend to reap the largest benefits.
The same may well be about to happen to the private equity sector, which shows all the signs that disruptions are underway. De Laval tells us how technology will transform private equity going forward.
It will be less and less ‘alternative’, in any sense of that word, and be far more mainstream as an asset class. There will be more fund managers and investors with even more capital flooding into a crowded space. There will be a blurring of the line between GP and LP, as they develop direct investment capabilities. There will be more specialisation between direct and indirect investors instead. Retail investors will likely play a greater role as well.
It is almost certain there will be more regulations no matter what role retail investors play. Regulators will be devoting more time and resources to alternatives, but standards will also be more codified, as ILPA, or some other industry body, will eventually force alignment and leveling-up of industry practices. Capability certifications like CAIA will also bring in more structure and rigour in alternative investment and portfolio management practices.
Without question, we expect the industry will only grow more innovative and sophisticated in response. Managers are going to devise new sourcing and value creation strategies to make use of all that dry powder. And they will do that by becoming more specialised in the pursuit of deep expertise, either in very specific geographies or industry sectors or asset classes, to maintain superior returns and premium fees. Data analytics will play a huge role in developing those more specialised strategies.
There will be greater liquidity as well. Data will become more commoditised and we can expect the emergence of secondaries trading platforms. Data analytics will play a huge role in developing those more specialised strategies as well.
We see private market technologies mirroring the kind of technology landscape currently in use on the public market side. However, there is an opportunity to learn from what has been developed over the last 30 years on the public market side, to leapfrog some of steps of that evolution to catch up quickly, and even go beyond that.
For example, the availability of granular, timely and digitised investment data is a critical catalyst to the maturation of the private equity industry. As happened for public markets, data will become a commodity.
The development of much more sophisticated analytics to manage not only performance, but also risk and liquidity, on the back of more data availability, will only be an extension of public market practices into private markets. Even more directly, secondary trading platforms will offer a new level of liquidity, not on par with public markets of course, but it will go a long way to removing the illiquidity that kept some investors out of the market.
Advances in artificial intelligence will only speed these trends, by helping the sector gain scale and by creating leverage for currently stretched resources in critical activities like data collection, target screening, due diligence and manager selection. AI powered solutions will not replace the talent of analysts and managers, but it will help them achieve more by scaling up their skills.
Right now, we see an increasing specialisation happening in our industry. Portfolio and operations management systems are getting progressively more sophisticated at what they do. At the same time, front office information exchange and analytics platforms are getting better at their mandates, delivering more sophisticated, insightful analysis out-of-the-box. While the two solution sets operate alongside one another, the data feed is the connecting link between them.
Portfolio and operations management systems need to manage an increasingly growing complexity and therefore will need to offer extremely rich and robust features, while staying agile to adapt to evolving practices and norms. Their value will be in their reliability, in the level of automation and productivity gains they enable, and the compliance they will secure.
Meanwhile, the availability of private market data services will enable even better front-office platforms to emerge. Those platforms will be essential for all private equity investors, whether they are direct or indirect investors, to make investment and portfolio management decisions, to the point that they will become true information hubs.
These hubs will enable the controlled exchange of information between players and integrate advanced analytical capabilities, consolidating a number of tasks that are currently at best delivered through separate, poorly integrated solutions, if not managed manually or not at all: investor reporting, data and information exchange, portfolio management, pipeline management, investment decision-making, performance and risk measurement, liquidity management, benchmarking, advanced portfolio analytics and, ultimately, secondaries trading.
Meanwhile, investors will also be looking at developing an end-to-end ‘whole portfolio’ view, as alternatives will keep accounting for a larger share of their portfolio, well into the double digits. LPs will seek to integrate their private market technologies with the solutions they use to manage their liquid assets. In that respect, private market technologies will be much more tightly integrated with their public market counterparts than they are today. BlackRock’s move to integrate its industryleading Aladdin solution with eFront is a good illustration of that trend.
The availability of high-quality, granular and timely data is the single biggest bottleneck. Firms still lag in the digitisation of their records and performance information, but we are seeing this change. There is a greater willingness in private markets to share and exchange data, partly due to LP demands. Soon, the level of data that big funds-of-funds enjoy, that stretches across multiple funds, and all the way down to their underlying assets, will become the rule rather than the exception.
And that means GPs will be able to deploy that data for better deal selection, and LPs can use it for better manager selection. There will be more granular benchmarks among deals, and among managers, better identifying strengths and weaknesses. This could mean a vastly upgraded decision-making process, for both managers and investors, and an overall more effective industry.
This will, in turn, attract larger volumes of capital and create a virtuous circle. We actually see these technology evolutions as the trigger for alternative assets to definitely break through and become mainstream – a vision that will benefit all alternative investment professionals.