Private Equity Trends for Fund Managers and Institutional Investors

Key Private Equity Trends for Fund Managers and Institutional Investors

Private equity continues to deliver despite growing volatility in public equity markets, heated competition, and a slowing global economy. But what’s ahead and what forces will shape the industry?

Private equity has never been intensely involved in politics, but there are a handful of political issues that continue to be meaningful—carried interest taxation and the future of the Dodd-Frank Act are two examples. They have the potential to impact private equity significantly.

Notwithstanding any unanswered political questions, institutional investors can be assured that the fundamentals remain healthy. Lawmakers seem to be focused on growing the economy at a faster rate than we’ve seen in recent years. Consequently, private equity seems poised to continue its steady growth in the near term and to have good long-term prospects, as well. 

Coupled with this momentum in private equity is investor appetite. Understanding the GP-LP relationship in relation to current market dynamics is vital.

This is always an interesting dynamic to watch. The public capital markets have responded favorably to the results in recent presidential elections. If markets remain healthy, this will create more competition for LPs and tip the scale further in their favor.

Of course, as institutional investors know, one capital market is not a replacement for another. But momentum in publicly traded markets certainly has the potential to impact the private equity markets and, in turn, impact the relationship between GPs and LPs.

Fundraising is more competitive than ever, which means fund managers must take action to differentiate themselves.

We’re continually exploring and sharing thoughts about the potential for technology to be a key driver of competitive differentiation. And, it’s difficult to find areas that offer more gains than technology.

Technology continues to change the world rapidly by making us all more efficient, extending our networks, and enabling us to communicate in ways that weren’t possible previously. Private equity has historically been relatively slow to adopt technology compared to other industries. However, firms are increasingly aware that there are many ways that advanced solutions can help private equity managers differentiate themselves from their competition and connect more effectively with institutional investors.

And those solutions don’t necessarily have to be crafted entirely from new systems. In fact, at Altvia, our vision for redefining the way GPs, LPs, and portfolio companies communicate and relate involves technologies that many large, consumer-facing businesses are already using with great success to:

  • Better understand their network
  • Improve their relationships within that network
  • Be more efficient at servicing and communicating with that network
  • Having the data to service and support that network

But many fund managers still are not taking advantage of these significant differentiators. Of course, there is reason to believe that we’re still in the early stages of this next phase of private equity’s evolution.

If some of the B2C markets that were early adopters of the latest technologies are any indication, the returns will be impressive and will create outstanding differentiation for those who adopt them.

From institutional investor requests to compliance reporting, the pressure is on fund managers to capture, track, and report on an enormous amount of data. This shift is driving efforts related to synchronizing operations with rapidly evolving digitization.

As technology advanced in recent years, its first impact was in the generating and storing of large volumes of data. Today, we’re in what you might call the golden era of data—a time when we’re starting to reap the benefits of using data to inform and drive decisions.

Both of these roles—generating and leveraging data—remain important to everyone from fund managers to institutional investors. However, smaller, service-oriented industries like private equity don’t have the luxury of scale that, for example, large manufacturing companies do.

Nevertheless, there are plenty of opportunities to use technology to make fund managers more efficient. In doing so, the key will be capturing and harnessing meaningful data derived from their activities. Said simply: The key to making firms more successful going forward will be empowering them with technology that makes them more efficient while simultaneously capturing and leveraging the data that comes from their work.

That’s a private equity trend that fund managers, institutional investors, and other stakeholders can surely get behind!

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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.

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