Private capital funds must adapt to meet growing data demands

Investors usually want to know what asset managers are doing with their money, how they are doing it and why.

Today’s digital technology makes this entirely possible. Indeed, mainstream asset managers are typically very good at giving their investors transparency in real time.

Private capital funds tend to be less transparent, however, largely because of the confidential nature of the deals they conduct.

Mainstream investors are increasingly attracted to the higher potential returns offered by private capital funds that now eclipse those of many other asset classes in a world characterised by record low interest rates. And these mainstream investors are bringing with them their appetites for transparency. They are used to having more data.

Private capital funds face a challenge – do they meet these new requirements, or risk becoming uncompetitive and even incurring regulatory fines?

Intertrust Group has teamed up with Global Custodian to research the extent to which chief financial officers (CFOs) at private capital funds anticipate increasing demands for transparency from investors and how they will react.

LPs want more data delivered quickly

Our findings*, outlined in a new report entitled The future private capital CFO: Evolving in a digital age, show that over the next decade, CFOs expect their limited partners (LPs) to require data updates with increasing frequency.

Almost two thirds (64%) of respondents expect their investors to be looking for access to live or daily updates on portfolio performance and 57% on cybersecurity, while 51% expect a need for daily or live updates on environmental, social and corporate governance (ESG) and 50% on operational service level agreements (SLAs).

The top priority clearly being given to portfolio performance is unsurprising: it is of course the main reason to invest. The expectation of daily or even live updates on performance is perhaps a little surprising though given most private capital funds calculate NAVs monthly or quarterly.

However, performance indicators are not limited to NAVs. Sales figures, cash and debt levels, rent collections – these are all indicators that are extremely relevant to performance and risk and do change on a daily or even real time basis.

SLAs are an integral part of these performance deliverables, while cybersecurity is a major concern not just for the investors but the service providers and funds too.

Growing importance around ESG

GPs should take note of the global momentum building around ESG and D&I. They are given less priority by our respondents, but investors increasingly want to know not only that their investments adhere to ethical standards, but also that they have positive environmental and social impacts. As standards around these issues become more consistent, compliance with them will be an essential factor in investors’ selection of funds.

Why outsource?

How will CFOs meet these increasing demands for more information? The three most popular responses are to invest in technology, which was cited by 24%, followed by increasing the size of the in-house finance team (23%), and more than one in five (22%) saying they will outsource more functionality. 18% were aiming to invest in distributed ledger functionality while 11% say they will retain the existing balance between in-house and outsourcing.

The circumstances driving decisions on whether to outsource differ from company to company. History does offer a lesson for private capital managers, though: several large mainstream asset managers in the past built large in-house solutions before deciding that outsourcing was the best option.

The complexities involved cause significant and, in many cases, unexpected costs. The competencies required are not always readily available to hire and keeping pace with wider industry standards and technology developments can be an expensive distraction from what fund managers do best – raising and deploying capital.

It is essential, of course, that private capital funds partner with high quality service providers which are robust and capable of meeting their bespoke needs. But as the cost of implementing the frequent technology upgrades that will be needed as volumes of data and security measures grow in complexity, it may well make more sense for them to outsource to a provider that can ‘mutualise’ the costs by serving a broad range of clients. If that provider has a global network of offices then that will be all the more attractive to LPs with international outlooks.

Download the report

*Source: Global Custodian in partnership with Intertrust Group; a global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021