Learning from Past Experiences to Navigate the Future of Private Markets

Today’s private markets investors are clamoring for more transparency into their underlying investments. This trend is fueled by increasing allocations within private markets from investors who are growing more sophisticated in their needs. As a result, LPs are mandating GPs to quickly respond to ad-hoc inquiries, provide timely access to information, and deliver detailed periodic reporting.

Historically, investors received annual reports with sparse information regarding underlying investments, expenses, fees, and drivers of return. Today’s investors are growing more inquisitive in their asks of GPs and are mandating transparency more frequently throughout the investment lifecycle.

GPs often struggle to meet LP demands while juggling mounting data related challenges associated with growing their firms. Adding to the pressure, regulatory requirements also require GPs to scale up, all resulting in a dire need for technology to address the needs of several parties.

For firms on the path to providing greater investment-related clarity, success will often come from drawing on what they are already doing. That means starting with something tangible and bite-size, learning along the way, and building on the data journey over time.

Data explosions and the need for transparency

The growth in private markets and corresponding explosion in size and complexity of datasets has inevitably led to demands for increased transparency from all core parties to GPs such as investors, regulators, and more.

To illustrate the acceleration, data volumes have grown exponentially compared with AUM since 2010. Preqin estimates forecast that AUM will continue to increase an average of ~12% per year³ while forecasts from Statista estimate that global data will expand 60% year over year⁴. Conservatively, that means if data in private markets increases by only 30% annually, firms will triple the data they manage in less than five years.

Data and AUM growth projections from 2010-2028

Recently published research from the Private Funds CFO Insights Survey 2024 surfaced challenges CFOs face in responding to greater demands for regulatory and LP transparency. In the past 12-24 months, almost half of the survey’s respondents reported that LPs are asking for more detail and analysis from their GPs. And close to two-thirds of respondents noted LPs have been showing increased levels of interest toward managers’ back-office operating models.¹

Firms must be prepared to scale up their reporting and analytical capabilities to meet the demands of a changing landscape. The shift toward diverse fund products coupled with expansion into the individual investor market brings new regulatory attention, reporting demands, and a heightened need for investor transparency. As fund managers embark on this expedition, there are certain lessons that can help navigate the road ahead.

Define a roadmap for tech modernization

Instead of trying to address all constituents’ needs at once, it is essential to approach the quest for transparency one step at a time. By focusing on meaningful use cases and learning from experience, firms can gradually enhance their data management processes and improve transparency in their operations. Learning from each small step is key to building a solid foundation.

Market feedback certifies the need for a solid, long-lasting foundation. As technology continues to advance, with cloud-native platforms becoming increasingly prevalent, firms will also need to assess if their legacy tech stacks are up to the task of supporting a digitally integrated ecosystem.

By taking incremental steps, evaluating legacy systems, and leveraging innovation, GPs can create a culture of transparency that not only meets the needs of their stakeholders but also sets them up for continued success as their business grows.

Understand data infrastructure maturation

As data volumes surge, private market firms must be ready to transition from siloed systems to unified, cloud-based platforms. This ideal end state is a robust, auditable platform that empowers all business units, facilitates better investment decision-making, and supports scale.

The benefits of a centralized ecosystem extend beyond transparency, offering efficiency gains, reduced key-person dependencies, and a faster transformation journey from legacy environments to modern, cloud-based setups.

Despite advancements, many private market firms are still in the early stages of modernizing infrastructure. While some firms have adopted technology to support fundraising, finance, or portfolio monitoring, data is still siloed across systems. The evolution toward a unified, cloud-based platform will enable firms to implement a seamless data management and governance strategy, integrate information from upstream and downstream systems, and ensure clean and accurate data.

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Create efficiency through unified data platforms

In Arcesium’s recent proprietary survey of investment data management professionals, which explored the priority initiatives, barriers, and decision-making criteria of private markets firms, the responses were in some ways expected. Yet, many were still eye opening. Survey respondents spoke about concerns in attaining a consolidated and reliable view of data, hesitations about the accuracy and integrity of data, and growing demands to leverage data analytics to make more informed investment predictions and decisions.

A consolidated and reliable view of data will be particularly pertinent for firms looking to instill accuracy, integrity, and analytics capabilities.

A modern data platform purpose-built for specific needs has the opportunity to become the backbone of your firm’s data ecosystem. Integration capabilities and an ability to run quality checks with lineage provide a transparent framework for efficient data management and governance.

CASE STUDY: Improving the Private Markets Investor Experience

Expertly navigate the modernization journey

Transitioning to a unified data platform is not without challenges, and firms often find themselves at different stages of this journey. The key business driver should be value — whether you’re deciding to build or buy a platform, integrating with existing tools, or modernizing large internal infrastructures.

Moving to a unified data platform doesn’t have to be daunting. An incremental approach can demonstrate immediate value. Accessibility and ease of use are also crucial for user adoption. Focus on impactful use cases and ensure tools are user-friendly, support data democratization, and promote accessibility for all stakeholders.

As private markets fund managers deal with numerous variables, such as increased investor inquisitions, new regulatory requirements, difficultly managing vast data, the lessons learned become guiding principles that foster transparency, adaptability, and resilience.

To learn more about building a data-driven foundation, read our recent discussion with Private Equity Wire about the engine room of a modern private markets firm.

Sources:
1 Insights Survey 2024: How LP Scrutiny Is Increasing, Private Funds CFO, December 1, 2023
2 North America remains focal point of global alternatives markets, Preqin, September 12, 2023
3 Volume of data/information created, captured, copied, and consumed worldwide, Statista, November 16, 2023

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