Article 2: Staying on top of technology
In the second of a four-part series exploring the main challenges facing US private equity houses in a constantly evolving marketplace, we outline how outsourcing partners can provide best-in-class software know-how at affordable price points.
The technology infrastructure required to run a private markets firm a decade ago couldn’t be more different to what is expected in the current market.
General partners used to be able to run their organizations using a basic accounting software package, spreadsheets and email and focus resources and time on the core front-office functions of sourcing and exiting investments.
As the private markets industry has expanded, the operational demands facing managers have ratcheted up. Deal and fund structures have become more complex (see Part 1) and investor and regulatory reporting expectations have increased.
As a now mature industry responsible for managing significantly higher volumes of investor dollars than a decade ago, managers have had to reappraise their operational backbone and investment in back-office capability.
Technology has served as a key enabler for helping managers to address the profound shifts in expectations around how they run their businesses, but the implementation of new technology, systems and processes comes with significant upfront capital expenditure and ongoing maintenance costs.
For large-cap firms managing vast, multi-strategy platforms, size makes it possible to keep the required technology expenditure as proportion of a manager’s total expense ratio in check. For managers with a much smaller family of funds to manage, keeping technology expenditure in check can be incredibly challenge.
Partners providing support
Working with a fund servicing partner provides a pathway for managers to make the necessary investment in technology infrastructure without allowing capital expenditure on technology to drain resources from a firm’s core competencies of dealmaking and portfolio company.
A fund services provider with a global footprint, managing thousands of funds on behalf of clients, can build and maintain in a technology platform of the scale that would be impossible for a single manager to match.
Scale and operational synergies put fund servicing providers in a position to provide a combination of best-of-breed industry software and proprietary tools at cost-effective rates that can be benchmarked against the wider market.
Alter Domus, for example, works daily with all the marketing-leading private markets software suites – FIS Private Markets (Investran); Allvue, eFront and Yardi – and
can also overlay best-of-breed software with proprietary technology that wouldn’t be feasible for single managers to build in isolation.
The 3rd generation of fund operations
With private equity now a mature, fully-fledged part of the financial
firmament, and volumes of funds and data exponentially rising, only the enhanced use of technology, such as Alter Domus Digital Workflows Application for private equity, can sustain and support AUM growth
Purpose built from private equity, these workflows are designed to handle the data volume and complexity of both classically structured and secondaries funds. They harness automation and AI to build a “digital bridge” between client and fund administrator, and therefore create a collaborative, non-siloed approach to working. to manage the growth and complexity of their portfolios.
This technology heralds the arrival of the 3rd age of fund administration and has helped our clients improve operational efficiency and transparency across their portfolios, end reliance on outdated communication channels and collate data into an analysis-ready source of truth.
Learn more about our Digital Workflows Application for private equity here.
High interest rates and market volatility have put the brakes on private equity exit activity during the last 12 months, with serious consequences for investor distributions and fundraising.
US exit deal value dropped to the lowest levels the first COVID-19 lockdowns in 2023, with year-on-year deal value falling by more than 50 percent to US$174.98 billion according to Dealogic data compiled by White & Case.
Exit value has suffered similar large declines in other global markets, which has seen the bank of unexited companies sitting in portfolios swell to more than $3 trillion, the highest levels on record, according to Bain & Co.
There are hopes that as the interest rate outlook stabilizes and buyers and sellers form a consensus on valuations that traditional exit routes will spark back to life, but there is widespread acceptance across the industry that managers will have to also work other exit channels – including GP-led continuation fund deals and distributions funded by NAV loan facilities – to clear the exit backlog.
New sources of liquidity
For managers with solid portfolios, there is strong appetite from both secondaries managers funding continuation fund deals and lenders offering NAV facilities to provide liquidity options.
GP-led continuation funds have created new pathways for managers and investors to monetize assets, realign portfolios and hold onto prized portfolio companies at the same time as making distributions.
GP-led secondaries have undergone an explosive period of growth, and although GP-led activity slowed in 2023, the GP-led market is still multiples larger than it was just a few years ago.
After a volatile year in M&A and IPO markets, which limited the scope for managers to secure exits and return cash to investors, the GP-led continuation fund deal market is expected to play a crucial role in helping firms to give investors liquidity and kickstart future fundraisings.
Continuation fund deals have had some exposure to the valuation disconnects between buyers and sellers in M&A markets during the last year, but drops in continuation fund transaction activity have been much narrower than observed in M&A and IPO settings, according to figures from Jefferies.
Managers have also increasingly turned to NAV financing – loans secured against the funds private equity firms manage – to inject liquidity into portfolio companies or, in some cases, make dividends to investors.
The use of NAV financing has not been without controversy, but with managers having to extend hold periods for longer than planned, capital made available through NAV loans has provided a welcome line of liquidity to keep funding portfolios and deliver some cash back to LPs.
Alternative exits: a back-office challenge
For managers with smaller back-offices than their large cap peers, these various alternative liquidity options have presented particular operational challenges.
A continuation fund deal, for example, will require substantial back-office resource to organise and execute, with ongoing administration and reporting to the investors in the new vehicle required post-deal. Putting an NAV-loan facility in place also requires back-office back-up.
For large private markets platforms with big back-office teams behind them these additional requirements can be absorbed by existing; but for smaller organisations scaling up back-office resource to accommodate a higher volumes of continuation fund and NAV financing deals is incredibly challenging and resource consumptive.
Working with an outsourcing or co-sourcing partner can help managers to handle the increasing reporting and administrative demands that come with continuation funds and NAV-facilities.
Fund administration partners will already be operating fund accounting systems and operational infrastructure at scale, and therefore be in a position to ramp up services for continuation fund and NAV loans as required.
Fund administrators also have the scale to invest in best-of-breed alternative assets software, and to supplement these platforms with proprietary tools and technology to help managers to handle the additional complexity and workloads.
Alter Domus’ Digital Workflows Application, for example, uses automation and artificial intelligence to collate data from multiple sources into a single stream ready for analysis; facilitating seamless workflows between managers and fund administrators to improve back-office efficiency.
Managers undertaking a continuation fund deal or NAV financing for the first time can also lean on the sector expertise of fund administration partners. Alter Domus, for example, works with multiple secondaries managers across its broad secondaries portfolio and is positioned to provide managers with first-hand experience and advice on what to expect from LPs and secondaries investors in continuation fund structures.
Utilizing alternative exit routes can be a daunting process for managers, but not something that they have to undertake alone.
Alter Domus is trusted by 90% of the top PE firms for our multi-sector expertise, award-winning technology and bespoke operating models. Find out how we can help you gain the upper hand in private equity.
