Private Equity Trends Shift from Performance to Risk Management

In an industry that has, for obvious reasons, historically focused on performance, the decision-making “calculus” has changed. Today, terms that come up with much greater frequency are “efficiency” and “risk management.”

Top Trend For Fund Managers: Focusing on Efficiency and Risk Management

A key driver for institutional investors who are choosing managers in private equity will always be their investment performance track record. However, in recent years, investors have begun paying attention to more than just returns. In particular, new requirements and regulatory issues have sharpened the focus on risk management and made it an important factor in decisions. 

Some of the parameters being considered include:

  • A firm’s operational processes
  • Risk from the institutional investor’s perspective
  • Alignment between requirements and operations

And, not surprisingly, when institutional demand comes or goes, the dynamic changes. For example, during the financial crisis, many institutional investors left private equity. At that point, there were a select few firms making commitments and the tables turned.

Today, institutional investors are back with capital for investment in private equity and asking fund managers why they should partner with them over the competition. And those investors have longer lists of what they want to see.

Effective Risk Management as a Necessity for Growth

Established fund managers with solid track records and more assets under management (AUM) have the resources (management fee income, headcount, etc.) to make capital investments in technology. And, typically, investments in technology infrastructure, which improve operations and enable better risk management, ultimately produce a competitive advantage.

Needless to say, this can change a firm’s success trajectory. By becoming more sophisticated from a technology perspective, they can meet the evolving needs of institutional investors, which improves their track record and helps them land more deals to fund further enhancements in their systems. And the cycle continues.

This dynamic is especially noticeable with emerging fund managers. There is something very attractive about them: the high alpha potential. It generates a great deal of attention when a partner or junior partner at an established firm, who has a great track record, spins off and finds a niche strategy with a smaller fund where the return is more impactful.

However, it’s becoming increasingly difficult to compete with the operational excellence of the large-scale managers, and the resulting gap leaves managers of all sizes asking what they can do to differentiate themselves. Institutional LPs seem to be responding loud and clear, and telling managers: “Track record isn’t the only thing anymore. Effective risk management and other factors are essential to us.”

Common Business Challenges: Filling the Funnel and Ensuring Proper Risk Management

A business challenge that many firms are having to address is the growing number of processes and amount of work related to managing a fund’s lifecycle. Specifically, being able to efficiently size up and organize a pipeline of investor prospects to whom you can pitch a fund is vital to success.

Everybody has a “Rolodex” of contacts. But having to meet the ever-more-rigorous expectations of investors effectively shrinks that list of appropriate targets.

Consequently, fund managers, today are wondering how they can be more efficient about filling their funnel. Technology, like fund manager software, obviously plays a key role here. For instance, Altvia helps fund managers keep their workflows together so that they can cast a wider net while still being fully aware of the details of every outreach effort. With better organization, fund managers can expand their funnel, track every deal’s progress, and make more effective decisions.

Another challenge is getting the right information to investors. How can fund managers provide the data investors are looking for in their desired formats and systemize the process for responding to these requests so that they can handle them efficiently? Even more demanding is servicing investors and prospects when the volume of requests increases.

For example, when a manager hits the road with a new offering, the requests typically start flooding in. People not only ask for data they can use to assess performance in various ways, but they also want to learn more about the firm’s systems, processes, and vendors. Unfortunately, many firms don’t have the infrastructure in place to respond quickly, clearly, and correctly.

Plus, not only does handling these requests take a significant amount of time, but the inquiries increasingly blur the lines between the different groups in a firm. This makes it difficult to ensure that the right people are contributing, that the process is efficient, and most importantly, that the investor is being delighted.

From Operational Efficiency to Risk Management: Key Takeaways for Fund Managers

The key to finding a solution that maximizes operational efficiency and also supports effective risk management is to first fully assess the need. In some instances, the most effective solution may be easier to implement than you imagine.

For instance, when you have disparate systems that provide input to certain workflows—say an accounting system that contains the data needed by the system used to meet investor requests—the best approach may not be to have someone create a costly and complicated integration between the two solutions involved. The right answer may be much simpler than that.

How will you know? Do the following:

  1. Start by looking carefully at the issue and summarizing it in basic terms. You might say: We need to deliver documents X, Y, and Z to investors more efficiently.
  2. Search for systems designed for that purpose. For example, Altvia solutions integrate easily with other systems. No costly, time-consuming customization is required.
  3. Assess the contenders, make your selection, and implement the solution. Once you’re confident that you’ve found the system that will provide the most benefit for your firm, you can turn your attention to implementing it.  

Firms are increasingly focused on developing comprehensive solutions that incorporate best-of-breed technology solutions, and we’re finding ways to integrate them and save time. From efficiency and productivity to risk management, advanced solutions produce a more positive investor experience and that leads to better results for the firm.

LP Experience

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