In The News
This article was originally posted in The Alternative Investor.
While deal making and historical returns remain the top performance metrics, leading managers are increasingly prioritizing operational excellence, and for good reason. Operational missteps can trigger a range of consequences including regulatory fines and damaged investor relationships. Operational precision will continue to influence Limited Partner (LP) allocations throughout the year, and General Partners (GP) should take heed of strategic drivers that may impact their approach.
Growth of Complex Fund Structures
Managers are increasingly turning to semi-liquid or evergreen funds to meet the evolving needs of LPs participating in private markets while looking to maintain periodic liquidity. Although these funds provide greater flexibility, semi-liquid structures inherently raise operational considerations and create new layers of complexity for managers.
With evergreen funds, cash and liquidity management needs are heightened due to increased inflows and outflows with no fixed maturity date. Redemptions, NAVs and investment performance calculations become more complicated and matching liquidity between investors and investments becomes challenging when compounded by slow pay provisions or lock-in periods.
Unsurprisingly, managers are turning to experienced providers to tackle these complexities. For example, our advanced fee calculation tool runs waterfall, carried interest modeling, and performance fees per investor in the fund. Our integrated automated payments and settlements platform provides solutions for slow pay and full redemption, both important GP tools given the increased liquidity opportunities with evergreens.
Increasingly Complicated Investor Needs
As complex fund structures entice new entrants into private markets, GPs require targeted yet highly flexible operations to serve long-standing institutional LPs and incoming high-net-worth retail investors. Operational demands and baseline requirements, including fee calculations and allocations, are becoming more complicated due to these varied participants. For example, while institutional investors are used to NAVs and capital calls, retail investors may be accustomed to real time valuations and upfront funding as seen in public markets.
Adding operational complexity is the need for timely, standardized and reconciled reporting to provide investor transparency. For LPs, regulatory requirements for disclosure obligations, such as beneficial ownership reporting, continue to increase. Fee transparency and fees paid to managers are also of growing interest when determining capital commitments. LPs continue to demand manager alignment with the Institutional Limited Partners Association (ILPA) guidelines in addition to clarity on capital calls, distributions, carried interest, and allocation details with calculations they can verify. Consistently meeting these obligations and regulatory requirements, at scale and as required, is nearly impossible without specialized infrastructure and jurisdictional expertise.
Necessitating an Automated Bespoke Approach
To meet an increasingly high bar, GPs are looking to safely deploy institutional grade capabilities to support their private market operations. Leading managers understand that partnering with trusted specialists who custom-fit processes and automate front- to back-office activity, all within a highly controlled environment, saves time and creates efficiency. Notably, both private and public market tools have been revamped to support semi-liquid funds. Our teams have developed flexible, automated solutions for calculations, collaboration tools, and other operational requirements for complex structures that are custom fit for each investment vehicle.
With thousands of funds vying for LP commitments, the private market ecosystem demands operational excellence. Managers must move quickly to implement the support required to transform today’s operational complexity into a competitive advantage.
