Limited Partners have expressed the need for change for years but progress has been slow due to the nature of traditional, paper-driven reporting. Digital innovation removes these limitations and creates new opportunities.
How GPs of Private Equity Funds Can Deliver
New tools empower GPs to meet the demands of LPs while increasing value for all stakeholders. Here are the top four needs of limited partners unlocked by digitalization:
1. Better Reporting
Limited partners want more transparency and better information quality at the level of the fund and portfolio company.
According to Intertrust’s North American Private Equity Outlook, fund managers are feeling the pressure to deliver:
80% said investors are demanding increased levels of transparency from managers with regards to the performance of underlying assets in each portfolio.North American Private Equity Outlook, Intertrust
Reporting needs go beyond traditional performance metrics. Intertrust’s report reveals investor demands for greater insight into fee structures, risk exposures, and expense allocations in addition to traditional portfolio metrics.
Limited partners also require greater access to updated information. This is no longer optional – 63% of limited partners expect “live or daily updates on portfolio performance.”
The pressure is on, but funds that embrace digital innovation can rise to the challenge by consistently delivering high-quality information at scale. Those that deliver transparency to limited partners will develop deep relationships and attract more assets under management.
LPs seek co-investments. Funds generally want to deliver and the majority anticipate offering co-investment rights to limited partners. However, funds will need to prepare for this transition:
This will increase the complexity of the fund structure, which in turn increases operational complexity and regulatory obligations.North American Private Equity Outlook, Intertrust
This will increase costs and accelerate the need to adopt new technologies. Digital corporate governance and investor reporting will help deal with the nuances of co-investments alongside fund allocations without slowing growth.
3. Demonstrated ESG
Environmental, social, and governance (ESG) concerns have evolved into a requirement for most PE investors. In fact, 88% of North American PE fund managers expect firms to refocus the ESG considerations of portfolio companies over the next couple of years.
Limited partners have a growing list of ESG considerations and commitments must be followed by measurable results. From energy efficiency to staff turnovers and board diversity, funds must report ESG KPIs and provide a clear roadmap.
Principles for Responsible Investment (PRI) emphasizes that limited partners need to know ESG performance to make future investment decisions:
Demonstrating this [ESG] will be the single biggest driver of the responsible investment agenda in private equity.North American Private Equity Outlook, Intertrust
Change will not be easy and obstacles include integrating different ESG data, quantification and ongoing monitoring.
GPs need access to tools that help them tackle these problems. Governance is the most critical component of ESG and digital fund governance empowers managers to drive sustainability through consistent reporting, digital events, and seamless collaboration.
4. Better Returns
While ESG has risen in the ranks of concern, ROI is still the king. Limited Partners are ready and willing to invest in the growing private equity market if funds can deliver.
However, increased competition between funds allows limited partners to be more selective with their investments. LPs expect lower fees and “increased access to strong deal flows, liquidity options, and well-defined exit strategies.”
Funds wanting to attract limited partners will need efficient solutions in order to meet both needs at once. The competition is putting pressure on funds to move towards digitalization to maximize performance while keeping fees low.
Bain & Company’s Global Private Equity Report emphasizes the need to evolve alongside portfolio companies in order to stand out:
PE firms have become expert in diagnosing the need for digital change at their portfolio companies. Becoming more competitive in the years ahead will mean bringing those lessons home.North American Private Equity Outlook, Intertrust
A move to digital corporate governance transforms a fund and its portfolio companies at the same time, attracting limited partners seeking differentiated approaches and sustainable returns. This move requires careful consideration but delaying the move to digital can prove costly as competition intensifies and expectations grow.
Digital Private Equity Fund Governance
Digitalization can streamline fund governance and improve the relationship between LPs and GPs. Private equity funds that delay this move risk falling behind as competitors embrace the transition:
Digitalisation has come to the fore…there’s been a normalisation of online due diligence, hosting of Annual General Meetings (AGMs), or the use of data rooms to share data with investors.North American Private Equity Outlook, Intertrust
The benefits of digital governance go beyond investor reporting. The same tools help funds improve resource effectiveness and increase the investability of portfolio companies through improved corporate governance, enhancing returns.
Despite the current challenges, the majority of global PE fund managers (84%) believe they will benefit from digital adoption.
How We Help Venture Capital and Private Equity Funds
IntegrityForce offers the tools needed to meet the growing needs of limited partners:
- Dashboards to connect LPs, funds and portfolio companies.
- Newsletters for regular, high-quality updates, metrics, and context.
- Digital Events to participate in shareholder meetings of fund and co-investments.
- Document Library for simplified reporting and secure access to up-to-date information.