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This past year has changed the way LPs invest and operate by
highlighting the importance of technology on an operational level
and as an investment strategy. From the ways in which it impacts
fund analysis and due diligence, to the risks and opportunities it
poses as an investment possibility, LPs are re-examining the
options and rethinking their approach.
These issues were explored in a panel discussion I moderated at
the recent SuperTechnology North America conference. In "LP views
on technology: from investments to operations," a group of North
American LPs discussed the ways in which technology was changing
the way they operate and invest. Here are some of the highlights of
the discussion.
Lasting impact on investment operations
Panelists unanimously agreed that the shift away from in-person
interaction with GPs is likely to continue for the foreseeable
future.
A flash poll conducted during the event revealed that
three-quarters of LPs (75%) felt that investment due diligence was
the operational activity most impacted by remote working, while
only 13% chose portfolio monitoring and a further 13% chose
stakeholder and board meetings and reporting.
The consensus among panelists was that virtual due diligence is
not a short-term trend and will become the new normal among LPs.
Describing the due diligence process, one panelist said, "It's
great to be able to see someone and look them in the eye during a
meeting. But it used to take an entire day to have three meetings
in one city. Now I can have multiple meetings in multiple cities in
the course of a day."
A technology-enabled approach has also broadened the horizon for
LPs by enabling them to conduct due diligence and close business
anywhere in the world while keeping travel and other expenses to a
minimum.
Emphasis on transparency
Without as many (or, in some cases, any) opportunities to
discuss investment opportunities face-to-face, investors are
placing higher expectations on their GPs in terms of compliance and
transparency, including access to timely and complete data on fund
performance.
By extension, this shift towards more data-driven reporting and
communications is motivating LPs to invest in digital tools that
enable them to monitor, analyze and act on the data they
receive.
Uncertainties around allocations
While there are many new questions around the role technology
plays in LP operations, there are just as many around the role it
plays in allocations.
The panel agreed that every institutional investor needs to be
invested in technology, but agreed that setting an investment
strategy is not straightforward. Technology has evolved from a pure
play to something more complex and amorphous. As one panelist
expressed it, "'Technology', as a standalone sector, doesn't exist
today. There are infrastructure investments, buyouts and start-ups
that are undeniably linked to technology. The category is expanding
far beyond its current definition." Some investors are now
retaining consultants to help them diversify their technology
exposures in private equity.
The current sky-high valuations for tech present challenges too.
LPs must make a reasonable determination if tech valuations are an
aberration or sustainable. Valuation multiples may yet pull back
from today's levels, but still remain high relative to historical
norms, in which case entire portfolios could be mis-priced.
However, LPs must also consider that multiple expansion in tech
provides perhaps one of their best hedges against multiple
contraction in other sectors of their portfolios.
Technology - disruptor and enabler
Technology has long been seen as a disruptor. However, as
investors emerge from a tumultuous year, technology has also
emerged as a vital means of combating the disruption caused by
unexpected economic and operational challenges. As LPs adapt to
virtual operations and a fast-evolving investing landscape, they
are taking a deeper look at technology's potential to help them
manage change, strengthen performance and identify new
opportunities as they arise.
Posted 10 March 2021 by Chris Sparenberg, Director, Product and Data Strategy, Private Markets
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
