Introduction
In 2020, European private equity firms raised €92.0 billion across 90 funds, marking both the second highest value ever and the lowest fund count in a decade (Pitchbook Annual European PE Breakdown Report, 2020.) In recent years, asset management has experienced a shift in investor popularity towards private markets and it is this change in direction that is partly responsible for driving:
- Increasing fundraising totals;
- The evolving investor landscape; and
- Inherent investor behaviours affecting the dynamics of the market
The ‘traditional’ LP of sovereign wealth funds, high net-worths and other private investors are still as buoyant in alternatives as ever, however there has been renewed interest from other large asset owners, such as pension funds and retail investors who typically have greater allocations in traditional asset managers.
In a recent survey run by Alpha on these asset owner types, 80% revealed they were likely to keep stable or significantly increase their Alternative investments exposure over the next 12 months for various reasons. This all sounds positive for Alternatives managers, however Alpha observe that few pure-play firms are adequately set up to source, interest and service this client group with more sophisticated and demanding requirements. In this article we will share how fundraising and managing investors is changing and the challenges these changes potentially pose for Alternatives managers.
So what has changed in the Alternatives investor landscape?
Different Drivers
Historically, Alternatives attracted a niche and focused investor pool, all with relatively similar investment goals and objectives. Increased interest from non-typical, large asset owners looking to increase their exposure of course means there is more opportunity to raise capital, but also provides a wider variety of different drivers and objectives to consider when marketing to or engaging with them – posing a greater challenge of targeting different pockets of dry powder, without diluting the value proposition.
Service Demands
Alternatives investors of recent years were typically lightly governed with light touch servicing requirements; translating into minimal reporting needs, little to no oversight from regulators, and low demand for operational transparency. These investors fit perfectly with the traditional operating model and their needs could be met, both pre- and post- mandate, by a very lean non-investment staff team. Investors have longed for better service and some firms have listened – investing in more sophisticated reporting & data delivery capabilities, investor portals and other initiatives to better the investor experience. However, these new entrants to the investor landscape have further increased pressure to adapt and provide services matching their traditional Asset Management partners, who have been investing in their client service capabilities for well over a decade.
Virtual Challenges
The COVID-19 pandemic has affected every corner of the globe, and whilst technology has enabled industries such as financial services to adapt and continue through remote working, the ongoing situation still poses challenges in day-to-day operations and provides uncertainty for the future. Some aspects of this increased reliance on technology have enabled teams to work more efficiently, such as the use of online collaboration tools, however a critical aspect of any fundraising or investor relations programme is engaging with investors, building rapport and trust – a tricky thing to do via video call.
So, what are my priorities?
The greater potential to raise capital comes with associated challenges, centred around Alternative managers’ ability to effectively attract new investors and efficiently service a greater volume of investors with more sophisticated requirements. Alpha have observed three key areas of challenges facing Alternative managers:
1. Go-To Market Proposition
With a changing investor landscape, the same go-to-market proposition for traditional Alternatives investors may not captivate new market entrants. Alternatives managers’ first challenge around this broader investor pool will be deciding where to focus fundraising activity in what are typically lean In an age where people and businesses are more connected to one another than ever before, Alternatives managers can utilise their networks and extended networks of influence (through Linkedin, Twitter or blog followings) to identify prospective new investors, however without a well thought out proposition new connections may never be converted into strong opportunities. With multiple factors to consider, some starting questions to assess your Go-to-Market proposition are:
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Can you articulate your value proposition?
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What kind of asset owners would gain value with your firm, and why would they choose you as their Alternatives manager?
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Are you leveraging your network effectively? Can you get your ‘foot in the door’ with new potential investors?
2. Effective Fundraising
A firm’s ability to effectively fundraise can enable them to take advantage of a broader investor landscape, whilst maintaining a lean operating model. Historically fundraising for Alternative managers has been an especially long and drawn-out process. On top of this, larger asset owners will have layers of governance to pass their allocation plans through, requiring multiple engagements, extensive ‘manual’ effort and often resulting in low conversion rates. Any sophisticated asset owners who are underwhelmed by the ‘slickness’ of the process will likely select a large household name brand – one which has proven experience in managing institutional client money. When assessing fundraising effectiveness, Alpha considers:
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Do you have sufficient CRM to track opportunities and utilise data?
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How do you plan to effectively fundraise virtually?
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Are you prepared for more detailed due-diligence checks? Have you assessed your firm’s ESG credentials?
3. Investor Experience
Many firms offer a similar proposition to gain exposure to the private markets and increasingly, decisions on new allocations or increasing existing allocations are no longer purely financially driven. As financial services and many other industries have witnessed, client experience is a key factor to be considered. An Alternatives manager’s ability to provide a good experience and service can range from catering for operational requirements (such as providing data feeds via API or the provision of flexible reporting), to aligning on cultural factors (such taking into consideration common principles and vision or ESG commitments).
In a recent survey by Alpha, 93% of survey participants reported they receive ‘ESG data’ from their Alternatives provider however 73% said it wasn’t sufficient for their needs – suggesting a misalignment in the service expected and service provided. The relative importance of operational or cultural factors is unique to each investor and some of the key things to consider when assessing your investor experience are:
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How are you utilising digital channels to engage with your investor base? Do you have, or plan to provide investors with, a portal?
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Are you providing data / reports in the way your investors want? Can you enhance or amend your reporting capabilities quickly and efficiently?
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Have you engaged with your LPs specifically on their investor experience? Are you aware of their regulatory requirements or ESG commitments?
Conclusion
Whilst the new investor landscape poses many challenges, there are also many opportunities facing Alternatives managers. Investor-focussed functions have an opportunity to review and refresh ways of working; looking at operating models to ensure teams can remain lean even with the increased effort required and investing in new technology to be more effective in leveraging relationships, more diligent in tracking fundraising progress, and providing a better Investor experience.
Please reach out to Alpha’s Alternatives team if you’d like to learn more about how we can support you in responding to these changing market forces.
About the Author
Dominic Coyle
Manager
Dominic is a Manager at Alpha with over six years of consulting experience in financial services and is part of the Alternatives Practice at Alpha. Dominic has experience working with clients within the Private Equity industry on projects seeking to: improve investment processes; identify efficiency savings; and assess and implement vendor solutions.