Private Equity Trends Shift from Performance to Risk Management

What are key Private Equity trends for fund managers and institutional investors from 2015, and new opportunities for 2016? This was the topic of discussion with Jeff Williams, Altvia’s VP of Products, as we explored these trends and how fund managers and investors can lead for success.

What are some of the top trends for fund managers from 2015 and how are these trends changing the investor dynamic?

The driver for institutional investors choosing managers in Private Equity will always be investment performance track record, but the difference is how that has changed in recent years. There are now more factors beyond just returns; the bulk of which is being driven by institutional investors’ increasing requirements and regulatory-driven operational risk. And so how do we distinguish different parameters? A few in particular are operational processes, assessing risk from the institutional investor perspective and the need to have operations lined up. When institutional demand comes or goes, the dynamics turn. During the financial crisis, a number of institutional investors left Private Equity and there were a select few making commitments – and accordingly the tables turned. Now tables have turned back wherein institutional investors are at the table with capital for investment in Private Equity and asking fund managers why they should partner with them over the competition. There are longer lists of what investors want to see. Established fund managers with track records who have larger AUM are at scale and have headcount as well as the management fee income to make capital investments into technology. And it’s oftentimes the technology investment for infrastructure that can lead to a competitive advantage. So it’s like circular reasoning – the ones who have track records and capital for infrastructure, headcount, etc become more sophisticated and can answer the demands from institutional investors and then further build their track record.

And the dynamics of what people want tend to be what larger fund managers can provide. There’s something very attractive about emerging fund managers; there’s the high alpha potential – particularly a partner or junior partner at an established firm who has a track record, spins off and finds a niche strategy with a smaller fund where return is more impactful. But it’s becoming increasingly difficult to compete with the operational excellence of the managers at scale, and the resulting gap leaves managers of all sizes asking themselves what they can do to differentiate themselves. It seems to me that institutional LPs are responding loud and clear, and telling managers that track record isn’t the only thing anymore.

Considering these trends, what are the most common challenges that you’ve heard from customers?

The big picture about business challenges is the increased amount of work surrounding the processes and administration of a fund’s lifecycle. More specifically, challenges involve sizing up and organizing a pipeline of investor prospects to whom you can pitch a fund. Everybody has a Rolodex but given how challenging it can be to meet the demands of investors, which are only getting more rigorous, this challenge effectively shrinks the Rolodex. And so fund managers ask themselves, how can I be more efficient about filling the funnel? Technology, like fund manager software, obviously plays a key role here. Like the organizational component, Altvia provides to help fund managers keep their workflows together so that they can cast wider nets and keep track of it. With better organization, fund managers can basically expand the funnel and track it – and then make more effective decisions.

Another challenge is providing the right information to investors. How can fund managers gather exactly what investors are looking for and systemize these requests in different formats? Even more so is servicing those investors and prospects; for instance, once a manager hits the road with a new offering, the requests start flooding in – could we get a look at your performance in this way, that way? Can you provide us with answers to these requests about your vendors, your systems, your process? Many still do not have clear processes and systems that make it easier to answer these requests. While these requests obviously take extensive amounts of time, they’re increasingly blending the lines between the front, middle and back-office, making it difficult to ensure that the right people are contributing, that the process is efficient and most importantly, that the investor is being delighted. The rate of requests and spectrum of these requests are really causing challenges for managers who aren’t making investments in either headcount or technology to streamline the process.

What’s the key takeaway for fund managers?

The key is not to start sprinting and acknowledge where you’re at. Start simply by looking at the problem – the most effective solution may be easier than you imagine. For instance, when you have disparate systems that provide value in certain workflows, say an accounting system capable of providing the data needed to meet a request or provide documents to investors, it may not be the best solution for front office functions to field and handle the request. The fund manager may sprint to “produce a custom, expensive API that integrates the two systems,” yet this may not be necessary – it’s actually easier and more cost-efficient. Consider the basic issue – how do you produce these documents and deliver them to investors? By identifying the core problem, the solution may be relatively simple and this is how App-X uses technology to solve. Customers are becoming more and more attracted to putting together best-of-breed technology solutions, and we’re finding ways to integrate them and save time. And this is becoming even more apparent to managers because it’s making a positive difference in the investor experience.

About Jeff Williams:

Jeff joined Altvia in 2011 and is involved in the life-cycle of our product from sales through client implementations. Prior to joining Altvia, Jeff spent nearly four years as an Analyst and Associate sourcing and evaluating investment opportunities in venture capital funds and late-stage venture financings in private companies. He was also actively involved in the fundraising process and used AIM extensively to manage both the fundraising and investing processes.

In his free time, Jeff enjoys skiing and playing golf.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

investor experience