It’s hard to argue that this was a year like none other. In July 2020, I was interviewed by Infrastructure Investor for an outlook on data and technology trends within the Private Markets and specifically how the global pandemic was exacerbating many of the issues fund managers were facing. Risks around margins, returns, compliance and security were leading many managers push towards greater emphasis on data – especially how they better protect it and simultaneously better leverage it to make better, faster decisions.
I forecasted that Limited Partners (LPs) would further increase demands on fund managers during this time of uncertainty, which as recently discussed in a CFO roundtable put on by PEI, we’ve seen further extend into unfunded capital commitments, recycling of capital, higher expectations on fund governance, and greater scrutiny on lines of credit. It’s clear that institutional investors’ concerns about their performance won’t be going away any time soon as expectations of more and more transparency to best understand risks will only continue to increase.
Now that we’re nearing the end of this year, I thought it was time for a temperature check. How did Private Market fund managers do during this choppy, uncertain environment?
I saw two distinct groups of fund managers emerge over the course of this year.
What I’m calling the Duck and the Frog.
Fund Managers Who Fell Behind (a.k.a. The Duck)
In 2020, there were fund managers who stayed in the status quo, remaining complacent amid a sea of legacy processes and manual Excel-driven methodologies. They fell victim to what I’m calling the Swimming Duck Syndrome:
This is where many executives were heads down, focused on fundraising and fund allocations – business as usual that looked good on the surface – while just below, their business functions were frantically keeping up with bespoke investor inquiries (often pulling all-nighters) to deliver reports to exude confidence, performance in hand, with risk and compliance in control. Meanwhile, consequences loomed from decisions made using dated information or mis-information from poorly managed data.
Fund Managers Who Took Action (a.k.a The Frog)
In 2020, I also saw a significant shift among many top managers who treated the beginning of the year with a real sense of urgency; taking action on key initiatives with special emphasis on data. Now reflecting on the year, I see the foundations for what I expect will serve as major leap frogs against peers that will provide real differentiated advantages going into 2021.
Now I can also assure you that for most (if not all), these efforts weren’t easy. It took significant alignment to attain consensus which, in turn, enabled decisions and ultimate actions. But I can attest to many circumstances where these firms had many long debates to ultimately align on what problems they were trying to solve and what outcomes would drive the biggest impact.
I saw three key trends emerge in 2020 with outcomes that showed real promise of driving significant differentiated value:
- Organizations are getting serious about connecting the front, middle and back office.
Technology was traditionally deployed for single business-processes, resulting in data silos across the organization. That’s quickly changing. Firms this year utilized information across the parts of the business to make better decisions and enhance the experience for LPs. There were two primary examples of this: 1) Firms that executed based on their desire to integrate deal pipeline data into their existing asset or portfolio data to enhance decision-making, and 2) Firms with advanced integration of their LP to improve their reporting experience.
- Top managers accelerated steps to solve the “single source of truth” challenge across asset classes.
Organizations that invest in both public and private markets across Equities, Fixed Income and Private Capital accelerated efforts this year to drive data into a single platform. We saw those that launched data warehousing solutions aimed at solving the problem across public and private from the start far more successful in year than those that worked sequentially. I expect this trend, to tackle the problem holistically instead of piecemeal, to continue in 2021.
Another key trend was an accelerated focus among large multi-asset fund managers to get all of their investment business segments, such as private equity, real estate, infrastructure, and private debt, into a single data management platform. And for those I saw have clear signs of success, business segments and / or functions were able to provide requirements to newly empowered technology operations and product teams who then took the mantle to drive consensus, alignment and decisions.
- Firms finally weaponized their data to gain insights into the future, not just to look back at previous performance and trends.
With the global challenges of the past 12 months, managers were forced to think differently about their portfolios. A fund manager that is still unable to perform scenario analysis and stress tests across their business is now at a severe disadvantage to peers who leveraged 2020 to enable this. In fact, we’ve heard in many cases that scenario analysis became one of the main differentiators for key managers this year. Given further market uncertainties in 2021, we’re not sure how those relying on analysts and spreadsheets for insights will survive.
My Advice to both the Ducks and Frogs Before Wrapping Up 2020…
Wondering what to do next?
Consider a year-in-review message to your team recapping performance achievements, but more importantly laying out the challenges ahead in 2021. By late next year, we may begin return to some normalcy, but it’s clear we will remain in uncharted territory of uncertainty until then. I recommend seeking feedback (especially down to associate and analyst levels) in reflection of 2020 on the following four questions, which I too will be asking within my firm and am happy to later share in aggregate for those interested:
- Where was the majority of your time and energy was spent this year?
- What were the top areas of risk that increased in 2020, and what are you most concerned about going into 2021?
- What opportunities were missed as a result of your key inefficiencies?
- If you were CEO for the day, what would you first attack to drive the greatest impact in the first half of 2021?
I would bet big that you’ll hear in at least half of your responses something about the role data plays and how its management and utilization is a must to improve in 2021. Send me a note if you do. I would be really interested to hear what you learn!