Preqin: Why digitizing private equity can help meet growing investor demand

Authored by: Nikolaos Perros, Chief Operating Officer
Updated on: January 30, 2024

Digitization is critical to deliver the transparent and personalized approach private equity LPs demand

The private equity industry has reached the point where digital platforms are needed to compete. Investors’ demands have evolved to require processes that are both agile and intuitive, particularly those that cater to customized reporting and portfolio transparency.

A tighter fundraising environment means GPs must satisfy investor demands as fully as possible. While this is true for established managers, who are raising ever larger funds and absorbing a larger share of capital, it’s a critical success factor for newer managers. In our 2022 emerging managers’ survey, only one in 10 respondents secured a commitment four months after an introduction – far below the 31% who did in 2021.

Best practice reporting is essential for GPs that want to stand out to investors. LPs are no longer relying exclusively on personal assurances from their GPs. They’re asking more pointed questions and expect data to back up the claims, with their demands carrying over to operational transparency and the use of modern technology infrastructure.

No going back on investor reporting

LPs know what best practice looks like. The pandemic established a new precedent for GP-LP communications. As COVID-19 hit and the viability of portfolio companies came into question, many managers adopted a new communications style, providing weekly or even on-demand performance updates to reassure LPs. Should the market have returned to its benign, pre-COVID-19 state, GPs may have been able to return to quarterly reporting, but the continued uncertainty means investors want the higher cadence and quality of reporting to be maintained.

Digital platforms provide distinct advantages for LPs and GPs, offering easy and immediate access to consolidated data in one place. For GPs, they lift the burden of worrying about backend infrastructure. For LPs, digital technology is elevating the investor experience to one that is convenient, flexible, and personalized – like what they get in other industries. Whether it’s the ability to quickly download cash flows or to have one view of all their investments, anything that makes it easier for an LP to consume and process their data makes a GP much more attractive for future investments. Funds that cling to legacy processes will be left behind, while digitization is a way to satisfy investors and gain strategic advantage in a highly competitive environment.

Think you can DIY? Think again

While private equity doesn’t have a standard measure for client experience, firms are increasingly gauged by the insights they can provide. Building a digital solution in house is expensive, resource-intensive, and requires specialized expertise. Worrying about infrastructure, staffing, and training distract from the priority of investing LP capital. Sophisticated fund managers know this and are partnering with administrators who have practical industry knowledge with a singular focus on private equity. Purpose-built technology and quality digital infrastructure can manage the pressure of rising stakeholder expectations, ever-increasing operational complexities, and myriad regulatory requirements.

Private equity has progressed to where digital platforms are not only optimal for the LP experience, but a strategic imperative as investors continue to prioritize GPs that can meet these rising digital expectations. As we move away from the fundraising boom and into more challenging economic times, LPs will consider data availability and historical performance essential while determining their next allocations.

About

Nikolaos Perros is Chief Operating Officer at Gen II Fund Services. Gen II is a leading fund administration provider focused entirely on serving private capital asset managers and investors, enabling clients to realize greater levels of control, quality, consistency, efficiency, and transparency throughout their business.

This article originally appeared in Preqin Global Report 2023: Private Equity. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Nova providing the information in this content accept no liability for any decisions taken in relation to the above.

Published on: January 19, 2023