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.

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