Updated on: January 3, 2024
As the fundraising environment tightens, top-tier GPs are evaluating how their internal value proposition differentiates themselves to investors
This latest period of global financial instability has forced many GPs to reevaluate their playbooks with investors.
Inflation has taken its toll on a record level of dry powder stockpiled by fund managers. Even the top players are looking inward to evaluate how their digital maturity may impact their next fundraise and help them emerge stronger from the downturn.
Those who are successful cement their place among the next era of private equity powerhouses.
With a volatile market, however, comes new product innovation and additional pressure on GPs for operational excellence. Elite GPs, those who operate at a higher level already, are focusing on enhancing their key LP relationships ahead of the next fundraise.
As the business of private equity itself has matured, managers who previously championed their investor relations efforts early on came out on top of the fundraising race. Today, that’s not enough. Those that similarly prioritize and advance their data systems and technologies will be most successful.
The best-in-class have used this time wisely
In these times, investors have begun to make assumptions that some managers are sitting on their hands waiting for interest rates to improve as a means to artificially bolster their fund marks. They’re also savvy enough to see that the best-in-class GPs are getting more creative.
As a result, LPs will be attracted more to managers who use this uncertain time wisely. A recent report, “Fund Administration Technology, Private Equity’s New Differentiator,” found that 48% of institutional LPs are a lot more likely to invest when fund administration includes automation.
Key players understand this value proposition and are implementing adaptable technologies, according to, “Private Equity Outlook in 2023: Anatomy of a Slowdown”,.
Complacency could mean trouble
Fund managers who strategically leverage their time to focus on technology that allows them to implement, support, and adapt to creative deal structures will emerge on top. The elite performers who are committed to advancing their technology will be better suited to remain competitive and differentiate themselves in a saturated market of GPs and win.
On the other hand, PE fund managers not willing to catch up with digital transformation may soon be in trouble. In a down cycle, exemplified by recent Q2 PE fundraising numbers, evolution over complacency will be the difference between an LP re-upping or allocating elsewhere.
Complex products require a different approach
Products available to underlying investors have dramatically increased in complexity in recent years, and the resources necessary to manage that related data have also skyrocketed.
Top-tier GPs at the helm of this extraordinary product development are hunkering down and improving their tech stack.
As LP appetite for sophistication in both products and fund structures rises, private equity fund managers that can meet demands for complex offerings will likely rise to the top of investor lists during their next fundraise.
Partnering with third-party technology providers has allowed elite GPs to gain further market advantage against their middle-of-the-pack peers.
Without explicit investment in advanced technology, LPs will begin to question managers’ ability to navigate and report on increasingly complex funds. A lack of internal infrastructure built to increase transparency in investor communications will disallow innovation.
This is especially timely as regulators have made it clear that reporting requirements for private funds continue to be a top priority.
Rising to meet higher LP expectations
LPs want GPs to focus on what they know best, dedicating their attention to their portfolio and sourcing downturn-proof deals. Managers that are too focused on manual and legacy processes will be unable to keep up with the elite firms leveraging technology to alleviate burdens.
Technology can offer GPs a chance to rise to their LPs’ high expectations on trust, transparency and reporting out the additional data that comes with fund product innovation.
Those who use this recessionary time to make technology adjustments will set themselves up for growth once the market recalibrates and will be the most attractive to LPs. Those who remain stuck in their ways, unable to adapt to an evolving landscape will be left behind.
Published on: January 3, 2024