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How Can Emerging Managers Stay Afloat Through Volatility? Invest in the Investor Experience

This article is a contribution from James DiCostanzo from Allvue Systems. Allvue Systems is a leading provider of technology for investment managers in the private capital and credit markets industry.

As LPs look for safer bets amid the volatile private capital environment, emerging managers require the proper infrastructure to meet their expectations.

Per CVCA’s own data, Canada’s private equity and venture capital activity – much like the global industry – saw a slow end to 2022 and a shaky start to 2023, in terms of both deal activity and fundraising. Under this challenging environment, and especially as they grow in sophistication, LPs are highly sensitive to a clunky investor experience when it comes to accounting, reporting, and transparency. Meanwhile, GPs are pointing to data reporting struggles as the top operating challenges their funds face.

So what does this mean for emerging managers? For those looking to establish their name and build their investor base despite this challenging environment, these growing GPs should seek out the right tools and technology to enhance their middle- and back-office operations without adding headcount. Doing so while small and nimble – and during a quieter time in the market – is ideal. 

By investing in their own operations, emerging managers arm themselves with a competitive advantage that will earn the trust of their LPs and unlock new avenues for growth for the years ahead. 

Data Struggles Tainting the Investor Experience

According to data from a recent Allvue research report, 62% of emerging managers (under USD 2 billion AUM) named some category of fund data management as their top operating struggle. The breakdown of this statistic perfectly – and nearly evenly – illustrates the challenges facing emerging managers as they confront a growing urgency to impress and build trust with new investors.

Routine LP and Regulatory Reporting

Twenty-one percent of emerging manager respondents named routine LP and regulatory reporting as the top operating challenge they face. 

It’s true that, in addition to LPs’ growing reporting expectations, regulatory attention to the private capital space has been advancing worldwide. When emerging managers leave behind generalized accounting software in favor of systems built for bookkeeping and reporting for private capital strategies, they can count on prebuilt essential reports that reflect industry best practices, rather than manipulating a general accounting platform to provide a complex and bespoke report for data they’re legally obligated to share.

Ad-Hoc Reporting

When it comes to one-off reporting requests that LPs send into their GPs, 21% noted that serving this need is their fund’s top operating challenge. These requests are particularly challenging as they can be hard to anticipate and have the potential to derail planned team workflows. 

To address this challenge, managers should seek out some element of LP self-service in their technology stack, enabling them to outsource time-consuming, one-off fund questions from their small teams to capable portals that connect LPs to the majority of the investment information they should need. 

Portfolio Company Data

In hand with the previous challenges, LPs are desiring more specific fund data, including specific portfolio company data. In turn, 20% of emerging managers name accessing and analyzing their portfolio companies’ data as their top challenge. A private equity portfolio monitoring platform can answer those challenges, with specific workflows that guide collection, analysis and reporting when it comes to portfolio company data.

What to Look for When Building Your Accounting and Reporting Technology Stack

The beauty of the private capital industry lies in its possibility – with the right connections, a strategic eye for value, and a tight and capable team, any smaller manager can see a return multiple on par with or even better than massive, global players with limitless resources. But the status quo for a solid investor experience is changing, and it largely revolves around access to fund data. Per our research, managers have admitted to struggling with it. 

Whether managers choose to select a fully integrated suite of capabilities or to link up a stack of point solutions, there are key elements to consider when understanding what will best help your individual firm succeed. By finding the right mix of these benefits for your firm, you set yourself up for the ability to manage the technology administrative load without needing to add headcount to your team, while also making a crucial investment in investor trust.

  • Cloud-based infrastructure – Relying at least partially on cloud-based software systems makes for smoother upgrade processes with less platform downtime. And as remote work has continued in our post-pandemic world, the ability to use web-based software allows for better access between internal teams, third-party teams and your investor base.
  • Ability to customize reports – While having the standard private equity and venture capital reports built in is a necessity, it’s of course true that private capital strategies can be highly customizable, and thus need custom reports to accurately report on. Your chosen solutions should offer the ability to build new report templates around your own parameters when needed.
  • Investor self-service – As noted, investor expectations are reaching new heights, and many GPs express this as a top challenge for their operations. To respond to ongoing LP requests manually takes precious time from your lean teams, but by opening up the option for LPs to pull the data or reports they seek via a capable portal on their own time, your team is allowed the bandwidth to focus on high-value activities while letting technology take its part in building trust with your investors. 

While there is always a return to be gained from investing in capable software that will support your teams, I believe we are approaching a point where investor demand and expectations require sophisticated solutions, making more general tools, such as Excel or QuickBooks, obsolete for the private capital space. 

For emerging managers who have yet to make the investment, I urge you to seize the current market moment. As private capital volatility and down periods sort themselves out, the return on this investment will make itself clear for your teams.