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Gaining a competitive edge: Why GPs need to invest in technology infrastructure now

Eliot Hodges on gaining a competitive edge in the private markets

This article was originally published on Preqin.


 

Talk of the democratization of the global alternatives markets means investors of all types are seeking out the private markets.

There's been a lot of chatter over the democratization of the global alternatives markets, and investors of all types are seeking out the private markets. Still, very few people have spoken about the lack of infrastructure standing in the way of a brighter future for all. Bain & Company have issued a piece that sheds light on this critical constraint.

The infrastructure gap: barriers to new potential private market investors

The brief outlines the many barriers preventing smaller investors, particularly high-net-worth individuals and very-high-net-worth individuals, from accessing the multi-trillion-dollar private markets. It offers real solutions, including lowering investment minimums, establishing infrastructure and workflows for more predictable capital calls, improving transparency and reporting, and more continuous liquidity.

However, it largely takes the view that smaller investors with alt-starved portfolios would certainly welcome the outsized returns and diversification of private market investments. But what about the fund managers that are presented with most of the infrastructure challenges to onboard and serve these new classes of LPs?

The macro forces driving fund management investment

Since much of the infrastructure burden will fall on fund managers and their service partners, let’s dive into these macro forces acting on GPs and understand why they’re beginning to invest deeper in their middle- and back-office infrastructure than ever before.

1. The influx of investors

There was a time when private markets were the velvet-roped domain of large, experienced investors. This is no longer the case, partly due to the denominator effect, which occurs when the value of a portion of a portfolio decreases enough to alter the total value of the portfolio. After the public market took a hit in 2022, institutional investors with strict limits on how much they can invest in alternatives trimmed their alternatives allocations to maintain their ratios. Just as importantly, the private markets witnessed inflows from an array of investors either increasing their private market allocations or entering alternatives for the first time.

Either way, this left GPs either competing against other GPs for a smaller pool of established capital or chasing after new investors. This trend is forcing many GPs to become significantly more investor-centric in the experiences they provide, including how they attract, onboard, and serve their LPs throughout their lifecycle.

Predictably, we’re seeing many GPs transitioning to infrastructure to provide reliable, digital end-to-end experiences. This allows them to match rising investor expectations and meet the new standards set by Robinhood and other tech providers in the public markets. Significantly, this digital channel also gives GPs the flexibility to adapt their LP mixes for successive funds without having to dramatically scale up or down their middle- and back-office headcount, which brings us to the next trend.

2. The persistent talent shortage

Another trend impacting GPs is the talent shortage. Everywhere you look, from fund administrators and fund formation lawyers to investor relations professionals and auditors, people are overwhelmed with work. We expect this workload will only worsen with the move away from a small number of big investor checks to a large number of smaller checks.

Adding to headcount was a commonly used, viable option until talent shortages began to occur. The talent shortage is partly the result of the shrinking supply of qualified US-based accountants and more than 300,000 accountants leaving the profession between 2019 and 2022. This issue likely won’t resolve itself, as the number of accounting graduates awarded a bachelor’s degree and master’s degree after the 2019–2020 academic year fell 2.8% and 8.4%, respectively, extending a five-year trend of a decreasing number of accounting graduates year-on-year, per the American Institute of Certified Public Accountants.

Without the additional headcount to keep up with private market growth, which is estimated to hit $23.3tn in assets under management (AUM) by 2027 according to the Preqin Global Report 2023: Alternative Assets, leveraging technology infrastructure will be critical for GPs to retain and enable their existing teams to handle current and new investor relationships at unprecedented scope and scale.

3. Automation now, or a scramble later?

Finally, the last trend that will impact GPs is the regulatory environment. Private markets are already attracting greater scrutiny from Washington as it continues to democratize – a trend the crypto industry is experiencing first-hand right now.

Last year, the SEC Commissioner Gary Gensler remarked: ‘It is worth asking ourselves at the SEC whether we’re meeting our mission with respect to this important slice of the capital markets.’

We’ve already seen a set of new rulings impacting the use of side letters, as well as the need for regular audits.

Regardless of what the regulatory future may hold, it will be critical for GPs to confidently serve all their investors throughout the investment lifecycle without adding undue friction, cost, or risk to their processes. Planning ahead and making timely investments in infrastructure are strong ways of preparing for the regulatory ‘known unknowns’ and ‘unknown unknowns’ heading this way.

Enter Anduin: futureproofing the GP tech stack

Infrastructure investment can seem daunting. And, as we all know, private markets have historically been underinvested in technology, but a digital fund subscription platform can help teams onboard more investors with less time and resources, collaborate cross-functionally thanks to automated workflows and communications, and even capture secure critical regulatory-related data.

There’s no better time than now to begin making a change. In these uncertain times, it’s important to look for nothing less than reliable and flexible technology infrastructure for the future.

 


 

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