Growing data demands are raising pressure on private capital funds
Investors are understandably keen to know what asset managers are doing with their money.
For mainstream investors in publicly listed funds, this is usually not an issue. Indeed, today’s digital technology makes provision of vital statistics such as asset allocation and performance eminently possible, if not in real-time then certainly in a very timely fashion.
But mainstream investors are increasingly attracted to the higher potential returns offered by private capital funds, largely because their performance often outstrips that of many other types of vehicles. This is particularly poignant in a world dominated by low interest rates and returns.
The issue though is that private capital funds tend to be less transparent, largely because of the confidential nature of the deals they conduct.
While this can be a frustration for mainstream investors used to the transparency of public funds, ultimately it is up to private capital funds to come up with a solution. Do they meet these new requirements, or instead risk becoming unattractive to this rich new seam of investors and even incurring fines from regulators, whose appetites for transparency are also growing?
GPs must decide how much transparency they are willing to concede to keep investors engaged. But what do their investors want?
To gauge the thoughts of chief financial officers (CFOs) at private capital funds globally on these important issues, Intertrust Group teamed up with Global Custodian to research the extent to which increasing demands for transparency from investors is expected and what the CFOs will do in response.
LPs want more data and faster delivery
Our findings*, outlined in a new report entitled The future private capital CFO: Evolving in a digital age, show that over the next decade, CFOs expect their Limited Partners (LPs) to require data updates with increasing frequency.
Globally, almost two thirds (64%) of respondents expect their investors to be looking for access to live or daily updates on portfolio performance and 57% on cybersecurity, while 51% expect a need for daily or live updates on environmental, social and corporate governance (ESG) and 50% on operational service level agreements (SLAs).
The survey also included results specifically from Europe. Here, a similar number of respondents (63%) expect their investors to be looking for access to live or daily updates on portfolio performance, 50% on cybersecurity; 48% on environmental, social and corporate governance (ESG), and just 35% on operational service level agreements (SLAs).
Focus on performance
The fact that just half of all CFOs expect LPs to demand real-time or daily updates on cybersecurity is perhaps surprising, as cybersecurity is such a major risk for both managers and their LPs.
But the top priority clearly being given to portfolio performance in all regions is unsurprising: it is of course the main reason to invest. It is symptomatic of the modern expectation to have information instantly to hand.
The expectation of daily or even live updates on performance is also surprising, though, given most private capital funds calculate NAVs monthly or quarterly. However, performance indicators are not limited to NAVs; sales figures, cash and debt levels, rent collections – these are all indicators that are extremely relevant to performance and risk and do change on a daily or even real time basis. This result reflects the maturity we are seeing in the private capital market as mainstream investors enter it. SLAs are also an integral part of these performance deliverables.
GPs will have to pay more attention to ESG
The results on ESG globally and in Europe were generally perhaps lower than might be expected. Global momentum is building around the ESG theme and GPs will have to pay increasing attention to it. It might have been given less priority by our respondents, but investors increasingly want to know that their investments adhere to ethical standards and have positive environmental and social impacts. As standards around these issues become more consistent, compliance with them will be an essential factor in investors’ selection of funds.
Responses to these growing demands
How will CFOs meet these increasing demands for more information?
Globally, the three most popular responses are to invest in technology, which was cited by 24%, followed by increasing the size of the in-house finance team (23%), and one in five (22%) say they will outsource more functionality. 18% were aiming to invest in distributed ledger functionality while just 11% say they will retain the existing balance between in-house and outsourcing.
Investing in technology was also the most popular response in Europe, where it was cited by 28%. Other solutions on the continent included increasing the size of the in-house finance team (26%), investing in distributed ledger functionality (18%) and outsourcing more functionality (12%), while 12% say they will retain their existing balance between in-house and outsourcing.
Reasons to outsource
Moving towards more transparency is a transition that has already been made by hedge funds, which offers many lessons for private capital funds.
The cost of this transition should not be underestimated though. Our own estimate is that investing in technology to meet the extra demands highlighted by our research will cost private capital funds around US$5.5bn globally over the next five years.
But they will have to meet these demands for transparency, otherwise they risk losing market competitiveness – LPs will invest with those GPs that give them what they want, which will include transparency as well as attractive risk-returns.
The key question for GPs going forwards is how they adapt. While technology clearly has a key role in CFO responses to LPs’ increasing demands for more information, it does not offer a complete solution. Human resources are needed to monitor the technology and ensure it is regularly updated and in line with industry standards and regulatory requirements.
This function can be taken in-house but as the cost of implementing the frequent technology upgrades required as volumes of data and security measures grow in complexity, it may well make more sense for them to outsource to a provider that can ‘mutualise’ the costs by serving a broad range of clients.
It is therefore unsurprising that outsourcing is a growing trend in Europe, not least because it enables GPs to focus on what they do best – raising and investing assets.
Imelda Shine, Managing Director, UK and Ireland, Intertrust Group
*Source: Global Custodian in partnership with Intertrust Group; a global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021, including 70 in Europe.