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Future-proofing PE firms amid uncertainty

19 January 2023

Investor requests for greater data and transparency are driving PE firms to work with service providers to become recession proof.

Is private equity fundraising going to get harder with talk of a potential recession?  

High inflation and rising interest rates have impacted all asset classes, which is causing institutional investors to become more selective when it comes to allocating capital to private markets. This has led to longer fundraising cycles and an uptick in secondary market transactions as investors look to reshuffle their risk exposure.  

In an increasing interest rate environment, private debt remains an attractive asset class, and we expect to see a substantial increase in allocation here in 2023 since private debt instruments are usually attached to shorter-term benchmarks, which are well-protected against interest rate hikes. In times of stress, we have seen the private debt market perform well. We would expect bank lending to diminish and public markets to become increasingly restrictive during a potential recession.  

Our private equity clients will also continue to participate in the growing trend of opening up access to private markets for retail investors, as they seek new sources and pools of capital. This “democratization” is expected to continue further in 2023, driving greater demand for transparency and better information from investors. To support this, private markets are making more fund processes digital, including onboarding, transaction capturing, and reporting, to name a few. The ability to deploy technology solutions to remove the friction of traditional manual processes will be a key differentiator in the year ahead.  

We expect midsized managers to be impacted most by these developments, and do not expect the larger managers with extensive track records of raising capital to have any issues.  

As a firm, Apex Group is committed to assisting the capital fundraising process and working with midsized managers in North America and beyond in 2023 to enable them to connect better with investors and perform well during these uncertain times.  

We have invested in a digital solution to support fundraising, called Profilir which caters to both startups looking for first phase funding, and established growth companies seeking growth capital or partnerships—it connects LPs and GPs during the capital-raising process. We also acquired a company called Context365, which provides technology and events to connect alternative asset class investors with managers.  

Where are you seeing an increased data demand from PE firms?  

Our company has been dealing with an increasing volume of data-driven requests amongst private equity firms, not just in North America, but globally across our client base.  

Private equity funds involve investments in dozens of companies in an environment that is constantly changing. As transactions are becoming increasingly more complex, delivering the right level of disclosure to investors and regulatory authorities is also necessary, so that investors can make better-informed decisions and regulators can uncover any potential fraud. T0rpf; /b 

The Securities and Exchange Commission (SEC) has the power to bring enforcement actions against private equity firms for violations of the SEC regulations, but is currently limited by the level of opacity that is commonplace in the private equity industry.  

In February 2022, the SEC revealed plans that will require private fund advisors to provide quarterly statements detailing select information regarding fund fees, expenses, and performance. It remains to be seen whether these rules will increase transparency, competition, and efficiency in the $18 trillion private equity market, but accurate data monitoring and reporting is key. 

The increasing sophistication of LPs and their demand for greater transparency, particularly around performance and investment-level data, have also increased the disclosure burden on many private equity managers.  

Private equity managers need to have access to custom-built and real-time data to deliver the level of transparency required for institutional investors. Quarterly static data is no longer the norm. We are increasingly being asked to provide access to dashboards built with custom reporting requirements in mind, drill-down features, and access to real-time data.  

Another increasingly crucial area is data analytics; the ability to collate and aggregate all the fund data and provide managers and investors with the ability to slice/dice their own data is critical now for private equity firms. This includes all manner of data, as there is so much out there for them to deal with and analyze now to obtain a true picture—including industry data, environmental, social, and governance key indicators, and financial information.  

How does outsourcing technology and reporting help PE firms to meet increased data and transparency needs from investors?  

The benefits of outsourcing technology and reporting are usually to solve problems for functions that are high-volume and resource intensive—for example, things that are manually done, repetitive, and with a degree of risk if not done correctly, like data.  

As an administrator, we must rely on technology to capture, consolidate, and analyze the mass of data to satisfy the reporting requirements of the manager and/or LPs.  

The principal drivers for working with a service provider are trust, transparency, guidance, strategy, value for money, and unlocking scale. In addition to delivering services and providing increasing sophistication of their client’s investor base, private equity firms must have access to the best-in-class technology.  

A lot of private equity managers are coming to Apex Group when it has become obvious that they’ve hit a point where they either need to invest in technology, or to find a partner to outsource to because we will have the technology and infrastructure to do it faster, cheaper, and more accurately.  

By using the best technology available, private equity managers can stay competitive and ahead of the curve when it comes to meeting the data and transparency needs for investors. Ultimately, technology empowers fund administrators to do more for clients and at a lower cost—to work more efficiently and with greater transparency to satisfy the increasing sophistication of the limited partners.  

How can PE firms ensure they have the right data strategy for 2023 and beyond?  

The data challenges in private equity firms are wide-ranging, but some recurring themes are emerging as we start to enter 2023.  

Based on conversations with our clients, the top challenges are focused on efficiency, integrity, and completeness around data consumption, data management, data validation, data aggregation, data integration, data reporting, and analytics.  

To overcome these challenges, North American private equity firms need to have a firm-wide data strategy in place, which they can then roll-out with their private equity managers, and sometimes it’s tricky to know just where to start.  

Firstly, there are numerous technology options out there. Secondly, new technologies are being rolled out all the time, so it’s hard to keep pace with innovation. Lastly, you need to invest time, energy, and dollars into implementing digital transformation strategies that might not be easy to come by, so it’s crucial to put your firm on the right path to success from the start by working with the right service provider who understands the nuances for the private equity industry and has a strong track record.  

How important is the collection and measurement of data to driving progress?  

It is critical for private equity firms to collect the right data and provide greater insight across all funds and asset classes to drive real progress—they can’t afford to stand still. This leads to better decision-making and, ultimately, value creation for investors.  

Forward-thinking private equity managers will leverage service providers like Apex Group to access the latest technologies and tools without adding any headcount to their businesses in North America.  

In addition, by partnering with us, they don’t have to deal with vendor management and decide which technology is most suitable for them, because that’s where we excel. We are skilled at finding the most optimal solutions for our clients, which includes putting the best operating model in place for their private equity firm and the right technology too—so that they can remain future-proof during uncertain times. 

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