It didn’t make headlines, but the news is a major development in the alternatives sector nonetheless. A large majority (83 percent) of limited partners (LPs) have either recently upgraded, or are planning to upgrade, their back office monitoring technology, according to a recent Coller Capital survey of LPs.
That type of stark departure from the status quo warrants some explanation.
For different reasons, LPs have been slower than GPs to embrace new technology. Public pensions are hesitant to spend tax payer dollars on new systems while smaller investors such as family offices and endowments tend to have less room in the budget for tech upgrades, even if it means savings in the long-run. As capital providers, LPs are also under less pressure than GPs to reap efficiency gains and savings from new technology in order to remain competitive.
So what’s changed? Three key trends explain the situation:
1) LPs now believe the technology is “proven”
Firstly, investors are growing more comfortable with the technology available, and so feel “safer” about material IT expenditures. Best practice today is for managers to send tax documents, fund information and data reports through secure online portals, such as Navatar Investor Portal, which LPs have become accustomed to using. To satisfy LP transparency demands, managers also send performance reports, straight down to the portfolio company level, using sophisticated investment platforms. LPs are impressed, and want a similar level of command over their data.
2) LPs are struggling to manage an influx of new GP relationships
A second trend relates to the number of new GP relationships being formed. Nearly half (40 percent) of investors plan to increase the number of GP relationships in their portfolio over the next two years, according to Preqin. This is a continuing trend from years prior. But managing this influx of new contacts is exposing the limits of Excel and Outlook.
So savvy LPs are accepting the need for technology to help manage the workload. Take Navatar Limited Partner Cloud for instance. The platform integrates relationship management tools with third party data providers like Preqin, which LPs use to find fund opportunities. With that integration, LPs can seamlessly tag funds that they are interested in, schedule automatic reminders for future evaluation, and centrally manage marketing documents and other materials sent to them by GPs under one shared system. Here’s an example of how some of that looks visually:
3) Greater complexity in the portfolio is making it harder to monitor assets
The third trend relates to the growing sophistication of LPs’ investment strategies. Investors want more co-investments and direct investments that offer fee-savings, diversification and higher returns.
But these strategies come at the cost of more portfolio complexity, which is a challenge for LPs. From the same Coller survey: five out of six investors believe that the LP community lacks the necessary investment skills, experience and processes to execute these more complicated strategies. Technology is LPs’ solution.
For example, we know that Navatar Limited Partner Cloud is used by investors to break assets down by pipeline stage, asset class and strategy, which makes portfolio monitoring simpler. With respect to co-investments, LPs use the system to track which managers deliver on the promise of quality co-investment opportunities pre-commitment.
There’s nothing suggesting that these three trends are set to slow in the time to come. The end result may be an industry better connected. At the moment, GPs are eager to see LPs implement technology that better communicates with their own newly adopted systems. To their delight, that desire is starting to become a reality.
P.S. Go here for a webinar detailing Navatar Limited Partner Cloud, a platform designed for LPs in light of these three trends.