Simply put, portfolio performance data is a GP’s most valuable asset. It is their record of achievement, their recipe for future success, and their best fundraising tool, all in one. That is why it is unfathomable that most GPs are still relying solely on spreadsheets, 30+ year-old software, as their primary tool for collecting, managing, and analysing their performance data.
Historically, spreadsheet-based performance data management and analytics meant that any “analysis” was limited by the cumbersome nature of the tool, and so output was centred on high-level performance figures. Fundraising conversations, as a result, only focused on these numbers too.
However, the era of “check the box” due diligence and portfolio reviews has come and gone. This depth of information is no longer enough for GPs or for their increasingly sophisticated and inquisitive investors. Limited partners are now digging behind headline performance figures to get a true understanding of what drove performance and how repeatable that is.
The Global Financial Crisis was a key catalyst in this trend, and the current market crisis is acting as a further accelerator in the demand for transparency and insights.
Fund managers who continue to leverage spreadsheets for such a critical part of their business and restrict themselves to speaking only in top-line figures are at risk of losing investor confidence, missing critical issues and opportunities in their portfolio, and being outmanoeuvred by peers.
Tomorrow’s leaders aren’t relying on yesterday’s technology to get there.
Adapt and evolve to mitigate risks
In the past, when there was admittedly a lack of appropriate technology available, fund managers could be forgiven for not truly leveraging granular performance data. However, in today’s market where a wide range of private markets specific tools and platforms are available, fund managers no longer have that excuse. In fact, failing to use and learn from performance data can become a source of substantial risk.
With the right data visualisation tools, fund managers can easily identify trends in portfolio returns that help inform their investment process moving forward. Conversely, without the required level of insight, fund managers may be dooming themselves to making similar under-performing investments in future funds.
Failing to leverage granular performance data can also create a disconnect between fund managers and LPs. Research we conducted in 2019 revealed that there is a substantial gap between GPs and LPs in terms of the value they place on metrics. For example, our study found that while 68% of LPs viewed loss ratios as “important” or “very important,” only 32% of GPs shared that view.
With investors committing increasing percentages of their portfolios to private markets, the level of due diligence and scrutiny placed on GPs is higher than it has ever been. During a fundraising process, managers who fail to take an in-depth and critical look at their performance data risk not having answers about their own performance that potential investors will want. Or perhaps more alarming, they will encounter a potential LP who knows more about their performance than they know themselves. Moving forward, fund managers would do well to make sure their views on the value of data align more with those of LPs.
On the flipside, GPs who have deep insight into their performance will have the opportunity to build investor confidence and differentiate themselves from the market by proactively using their performance data to evidence strengths and strategy to LPs.
Moving from analysis to insights
While many of the benefits of technology empowered performance analysis are tied to LP-related initiatives: fundraising, handling investor requests, et cetera, there are also many benefits for a GP’s own operations. Moving performance data management from Excel means that it becomes much more flexible, processing becomes more automated, and the risk of manual errors is mitigated. Rather than focusing time and effort building models and checking formulas, GPs can focus time on gaining insights and also be more confident in the integrity of the outputs.
Take for example Excel-based benchmarking or Public Market Equivalent (“PME”) models. These are large-scale and delicate projects that can function in Excel but not without time and careful attention at each step of the model-building process.
Purpose-built technologies for PME allow fund managers to simply input cash flows, select methodologies and comparison indexes, and run analysis. Moving away from Excel for analyses like PME helps eliminate opportunities for manual and data entry errors, while giving fund managers and their stakeholders the data they need, more efficiently.
Moving beyond Excel and using purpose-built tech also offers GPs the capabilities to understand their performance in the evolving ways that LPs are, as many are very difficult to recreate in spreadsheets. Zero-based and neutral-weighted IRR analysis being an example: zero-based IRR combats the timing effect of deals on IRR and neutral-weighted IRR removes bias of deal size. We are seeing more and more LPs use this technique to tackle some of the well-known issues of IRR when evaluating funds.
Implementation is just as important as execution
Making the decision to implement technology for this area of a firm is an important decision but not one that can be executed overnight. Fund managers must start by identifying the discrete problems they want to solve, or the specific new analytics capabilities they want to add to guide the decision: there is no single tool on the market that meets all the needs of all GPs.
A common question in this process is also, “buy versus build.” When asking this question, GPs would do well to consider the quality of their in-house technology skillsets and the hidden costs involved in building proprietary, customised technology. Ongoing maintenance is required and building an internal data system doesn’t allow for easy integration with other external platforms. Leveraging a SaaS-based tool benefits GPs in a number of ways – not in the least that they will gain from the “wisdom of the crowd” and be able to take advantage of new analytics and technology that is developed based on other clients’ feedback.
Most importantly, once an appropriate technology tool is identified and purchased, GPs need to remember that technology innovation and adoption is an evolutionary process. It is not a one-time project that can be a major priority, be accomplished and then no longer be a priority.
As the industry evolves and data plays a bigger role in driving decision making, your firm and your technology must also evolve with it.
Head of Division, eVestment Private Markets
Katey Bogue leads the Private Markets business for eVestment. Prior to this, she served as the Head of Alternatives for Nasdaq Private Market, providing secondary liquidity capabilities for private fund interests. Prior, Katey was a Principal at The Carlyle Group, where she spent twelve years in positions across Investor Services, Fund Management and Finance, mostly focused on streamlining middle office operations and reporting through technology and enhanced data management capabilities. Katey received her BS from Pepperdine University.