New Wave of Digitization Is Modernizing GP-LP Relationships

RC in the News

Catalyzed by the COVID-19 pandemic and the drive toward transparency, standardization and environmental, social and corporate governance (ESG) reporting, alternative asset management has become ripe for digital transformation.

"Asset managers have always used tech to support business development,” says Scott Voss, managing director at HarbourVest, one of the largest private equity investment managers globally.

"Digital subscriptions and onboarding have become more common — it is the low-hanging fruit when it comes to tech adoption. But it is only recently that this digitization process has been creeping into the mid- and back-end office,” he says. “[It is] adoption here that is really changing the industry."

Data collection, data sharing, portfolio monitoring, accounting and investor reporting are gradually moving from a process that included waiting for updates on outdated Excel spreadsheets — to management by third-party, full-service software as a solution (SaaS) services.

Artificial intelligence (AI), robotic processing automation (RPA), machine learning (ML), blockchain technology and big data are increasingly being adopted by SaaS companies to support general partners (GPs) and limited partners (LPs) when it comes to decision making.

The adoption of tech both streamlines operations and lowers the cost of administration while providing full transparency across investments and portfolios.

Indeed, for LPs tech adoption is an essential part of the LP-GP relationship. According to data compiled by the 2022 SS&C Intralinks LP Survey produced in association with Private Equity Wire, which polled 199 LPs, over 80 percent of those questioned claimed that it was important for GPs to embrace technology to improve the quality of portfolio reporting.

And while investors saw that progress is being made, they were explicit in their belief that fund managers must embrace technology — not only to raise the bar on transparency but to show, in much more granular detail, how underlying assets in their portfolios are performing.

Moreover, as technology enhances data collection and visibility, investing in alternative assets is becoming much more widespread. According to data compiled by Preqin, assets under management (AUM) in alternatives will grow from USD 13.32 trillion in 2022 to USD 23.21 trillion in 2026.

"Tech companies are developing processes to measure ESG, corporate social responsibility, impact, diversity, inclusion — and more — within portfolios because our clients are asking for it," says Voss.

GPs with the time, inclination and resources may prefer to rebuild their digital infrastructure from scratch, using their own in-house tech teams to build out tailor-made solutions that serve their specific needs.

"We are increasingly seeing fund managers hire data people to build out their own propriety systems,” says Voss. “A lot of the data out there is public, available on [a] subscription basis, so if you are able to employ the right algorithm, you can create a solution that serves your best interests."


Technology could also be the solution to greenwashing, which is increasingly infiltrating the industry.

"ESG, in particular, will force adoption and standards," says Jean-Philippe Boige, a partner and co-founder at Reach Capital, an independent fundraising and strategic advisory firm which focuses on private markets.

"Because of all the buzz around ESG, regulators will seize the opportunity to create strong recommendations to measure ESG-related key performance indicators (KPIs) and then GPs will start to actively invest in tech to keep up with guidelines.

"This will then spread into how we look at strategy, due diligence and more," he says.

According to The Kaspersky Global Corporate IT Security Risks Survey 2020, not keeping systems up to date can lead to data breaches — and cost more in the long run.

The survey found that large enterprises spent an additional 51 percent to repair and remediate their networks and data, an increase in cost from USD 836,000 to USD 1,225,000. For small- to medium-sized businesses, the impact was greater: They spent an average of 54 percent, raising the costs of a data breach due to running old software from an average of USD 74,000 to USD 114,000.

This may not be enough to influence everyone to upgrade, however."COVID has really influenced change in [the] industry more broadly, but I’d say that small GP firms are reluctant to change and adapt," says William Barrett, a partner and co-founder at Reach Capital.

"Most of them are made up of small teams, traditionally based in the same office. While COVID-19 may have encouraged the use of shared calendars, a shared drive and Zoom, not all of them have integrated high-end technologic tools to manage their businesses. Most of them don't measure the growth potential from it yet,” says Barrett.

Access to data

Access to data is lucrative, and companies that collect it are coveted in the alternative asset space. "Technology is still the most common area for investment, particularly in venture and growth," says Ethan Samson, managing principal, private markets consultant at Meketa.

"There are many reasons why this is true, but I think still the most common reason is that disruptions caused by technology offer opportunities for the large multiples of investment that GPs seek.

"That being said, many GPs do use the solutions they invest in that touch on data collection and sharing,” he says.

Despite the global economic downturn brought on by the global pandemic and exacerbated by Russia’s invasion of Ukraine, investing in Tech remains appealing, given their continued high valuations — and resilience — within the current context.

According to Reach Capital, the proportion of private equity-backed deals relating to Tech has been increasing year-on-year between 2012 and 2020, from 11.1 percent of the total to 22.4 percent in 2020.

"Through buyouts and growth, LPs are able to take on more exposure from venture capital (VC) and late-stage VC," says Barrett.

"This is a newer trend. VC investments rose exponentially during the height of the global pandemic and investors are keen to double down on this. We have seen allocation to VC and growth capital increase across Europe," he says.

According to the LP Survey, year-on-year, the survey figures for VC increased from 11 percent to 18.6 percent and suggest that this is an increasingly important area of the alternatives industry among LPs. With Technology and Healthcare featuring prominently in VC deal activity, this may explain why VC featured so strongly this year.

But there is still a looming question mark around valuations, says Boige. According to Reach, the median EV/EBITDA multiple for global software buyouts rose from 12.8x in 2019 to 21.4x in 2020.

"I am surprised by why some LPs are not digging further into the reasons behind the lofty valuations of tech companies today," says Boige.

"Some funds in the U.S. have an average price of 20x but LPs don’t seem to be that concerned and will continue to allocate while making adjustments due to re-ups.

"There are some nuances, however. The family offices we have spoken to seem to be taking a breather from tech investments. Meanwhile, pension funds are still keen to benefit from tech investments," he says.

Within the current context, technology will continue to play a large part in private equity and alternative investments going forward, especially as the industry continues its tech overhaul and valuations remain high. Exposure to the asset class may depend more on personal choice and appetite than valuation.