Managing Increasing Transparency Demands: The Power of Streamlined Data Collection for GPs

Over the past decade, private markets have experienced significant growth — more than doubling in size. This expansion coincides with a sustained period of strong returns, attracting institutions in pursuit of higher yields. In the early 2000s, pension funds allocated about 3% to the private markets. Today, that allocation has roughly tripled.

As LPs increase their allocations to private markets, they demand greater frequency in reporting and easy access to detailed, timely data, exercising a bias towards managers who can demonstrate modern operational infrastructure. GPs implementing technology that meets growing transparency demands can gain a competitive advantage.

How Have LP Data Requests and Reporting Evolved?

A decade ago, LPs with private market commitments usually received an annual report with limited details surrounding the specific holdings of their funds. Today, investors routinely ask GPs pointed questions throughout the hold period to understand the underlying drivers of fund returns and gain transparency into fund fees and expenses, expecting GPs to substantiate claims with highly auditable data.

Performance Insights

LPs traditionally sought performance insights at the fund level, using market data and benchmarks to contextualize performance relative to broader markets — often via public market equivalents. While LPs still prioritize these insights, they typically now take a more granular approach to measuring performance, requesting data at the portfolio company level. Eighty percent of GPs say LPs demand increased transparency about the performance of underlying assets in their portfolios.

Current market conditions have amplified LPs’ appetite for detailed asset insights. With higher interest rates and inflation affecting multiple expansion as a value creation lever, a renewed focus on margin expansion has emerged. Consequently, most LPs will persist in demanding operational metrics to ensure GPs can drive meaningful value and sustainable growth in their portfolio companies.

ESG

ESG increasingly plays a fundamental role in portfolio management. LPs expect GPs to identify, monitor, and address ESG risks in portfolio companies and regularly report progress against KPIs. The heightened focus on ESG means GPs must find a path to solve ESG data collection, adopting flexible technology solutions that accommodate multiple frameworks, taxonomies, and geographies.

Risk Analysis

LP risk analysis has become more in-depth. From scrutinizing loss ratios to delving into vertical exposures or position-specific data to understand company ownership breakdowns, LPs continue to expect quick access to granular data to support their risk analysis.

LPs also want the agility to quickly understand exposures to disruptive market events and macro shocks. When COVID-19 impacted global markets in 2020, investors urgently sought information from GPs to assess their vulnerability to lockdowns and supply chain disruptions. A similar scenario unfolded during Russia’s invasion of Ukraine and the collapse of Silicon Valley Bank as investors looked to pinpoint portfolio companies with exposures to both crises. As LPs’ ad-hoc reporting requests increase, GPs must adopt proper infrastructure to respond efficiently.

Valuations

In a difficult exit environment, where pricing disconnects abound between sellers and buyers, LPs continue to seek visibility into GPs’ valuation methodologies. In some cases, this means asking GPs for the underlying inputs of valuation models or to explain why two comparable companies in a portfolio have starkly different valuations. GPs must use data to support their valuations and demonstrate that calculations match the methodology outlined in the private placement memorandum (PPM).

Fund Economics

Transparency into fund economics remains a top priority for LPs who desire visibility into GPs’ fund expense policies and carry calculations. Regulatory initiatives, including amendments to Form PF and the Private Market Adviser’s Rule, further enforce this transparency by requiring GPs to disclose bridge financing, fund-level borrowing, fee allocation, and clawbacks.

Additionally, current market conditions challenge GPs from a fundraising and distribution perspective, fueling LPs’ desire to gain an intimate view of fund finances, particularly around leverage. Rising interest rates make LPs keen to understand a fund’s leverage exposure. Additionally, the growing popularity of net asset value loans to address fundraising and distribution challenges further compounds LPs’ leverage concerns.

Where Legacy Systems Fall Short in Data Transparency

As data requirements of increasingly sophisticated LPs continue maturing, GPs must rethink the processes and technologies that support the firm’s data collection and reporting activities. Firms leveraging spreadsheets or legacy solutions will struggle to meet LP requests with confidence, accuracy, and efficiency.

Legacy systems pose several challenges to achieving data transparency. Without a centralized source of truth for data firmwide, calculating portfolio exposures by sector and geography becomes a timely endeavor. Internal teams waste time tracking and aggregating data to support these requests. Further, traditional portfolio monitoring systems’ rigidity impedes GP’s swift response to LP requests.

Manual or semi-automated data collection systems expose firms to costly errors, jeopardizing the integrity of downstream analysis. When operational KPIs or financial metrics lack integrity upon ingestion, GPs risk providing LPs with inaccurate insights. Most legacy portfolio monitoring solutions lack the auditability to track a data point’s flow throughout a firm’s workflows. This becomes problematic when an LP wishes to further investigate underlying data for a valuation or other data request.

GPs using disparate systems will struggle to surface and validate the source of underlying data for ad-hoc analysis or valuation model inputs. Additionally, identifying the internal team members responsible for data approval or input at various stages of a workflow presents challenges.

The limitations in legacy systems pose reputational risks for GPs. If advisers cannot offer real-time insights to LPs on their exposures to an unfolding macroeconomic crisis or provide detailed transparency into fund returns or valuations, LPs may choose to invest their capital elsewhere.

How GPs Can Leverage Technology to Meet Increased Transparency Demands

Managers adopting a modern technology-driven operational infrastructure can secure a significant competitive advantage as LPs continue to prioritize transparency in allocation decisions. Specifically, some ways a next-generation portfolio monitoring solution can help GPs unlock data transparency include:

  • Easy access to consolidated data in a centralized interface. With data housed and aggregated in a single source of truth, GPs can easily access and slice and dice data for analysis, removing bottlenecks for responding to LP requests
  • Automating data collection improves data quality. Sophisticated validation features allow GPs to ensure the accuracy, completeness, and consistency in portfolio company datasets, and advanced functionalities allow them to flag inconsistencies and apply rules on different fields. As a result, GPs can trust the underlying data used for downstream LP reporting or requests
  • Flexible configuration empowers GPs to respond to LP requests efficiently. Flexible data modeling arms GPs with the agility needed to swiftly initiate pipelines for responding to LP requests
  • Audit trails allow GPs to track a data point’s origin. Advanced technology allows GPs to track a data point to its source document, providing unmatched transparency

GPs face a competitive fundraising environment, positioning LPs with an upper hand to demand greater transparency and efficient processes for ad-hoc reporting. GPs quick to embrace technology solutions that accommodate these requests will demonstrate a greater degree of institutional readiness. Ultimately, next-generation portfolio monitoring solutions provide the data integrity and traceability GPs need to meet growing transparency demands.

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