Nearly one year after our inaugural global survey of leading LPs, we polled global LPs and asset allocators again for fresh insights on where they see challenges and opportunities over the next 12 months. After a dynamic year that witnessed a continuously shifting economic picture, it was time to see if, and where, LP sentiments had moved.
In many respects, long-game-focused LPs stayed the course in many areas. But others produced some notable shifts. Here are the important takeaways from the second annual Dynamo LP Frontline Insight Report.
LPs Forging Ahead with Alternatives; Adjust How They are Investing
After 2022’s brutal decline in public equities, many economists forecast a recessionary environment in 2023. It was no surprise that 2022’s LP survey showed more than half of LPs (55%) were looking to increase their allocations to alternatives, seeking performance and diversification amidst a stock market under pressure.
The stock market made a surprising rally during 2023, even despite obstacles such as turmoil in the banking sector and a steady series of interest rate increases. But this resilience hasn’t erased lingering economic doubts and uncertainty. We wondered how this might affect the LP appetite for alternatives. Yet again in 2023, survey data showed it remains strong, with 56% of LPs indicating they are planning further increases in alternatives allocations.
When asked how they will do so, fund managers remained the top choice at 86%, an increase of nine percentage points. Co-investments remained the next-preferred avenue, increasing almost seven percentage points to 61%. A similar percentage in 2023, 46%, indicated direct investments, putting it in third place. Though secondaries remained in the fourth spot, interest increased over 2022 by seven percentage points. The most significant change was the movement away from cryptocurrencies. Only 3% plan to invest there, down from 13% in 2022.
LPs are Advancing Their Tech Stacks
With generative AI bursting onto the scene shortly after Dynamo completed its 2022 survey, the intense attention it generated in such short order was soundly reflected in this year’s survey.
The overwhelming majority (93%) of LPs indicated they plan to increase tech budgets again, and they want to put it toward automation and efficiency. Their top-ranked business priority over the next 12 months was to make technology work for their teams, automating investment workflows and removing manual tasks.
And, they expect even more from their fund managers. Automation and hyper-automation emerged in the top three areas they want fund managers to invest, but LPs are looking for fund managers to deliver on innovation, too. Generative AI was the top-ranked area they want fund managers to focus on, followed by edge computing and native cloud.
Economy Still Top Challenge, Internal Processes Are New Sticking Point
Given the conditions of the last two years, which have included stock market volatility, high inflation, banking tumult following the collapse of Silicon Valley Bank, and monetary tightening, it’s not surprising that economic conditions loom large in the mind of LP investors, ranked the top challenge LPs are facing in their business.
Behind the economy, LPs pointed to a new business challenge in 2023, and that was automating manual processes. In sync with their desire to direct tech spend there, the reasons for the push toward automation are likely several. Ever-growing amounts of data are proving increasingly harder to wrangle, and as such, LPs named document collection and data extraction as the top challenge they face when it comes to their investment processes. What’s more, LPs again named employee recruitment and retention as their third most-pressing business challenge. Amid the backdrop of economic uncertainty and talent shortages, LPs are feeling the pressure to do more with less.
Get the Full Update on the LP Mindset in 2023
The complete findings of Dynamo’s second LP survey provide more detail about how LP investors are thinking about technology to address key challenges and opportunities. It is available to download now. Additionally, Dynamo and Northfield are hosting a webinar on September 27th to further analyze and discuss the report’s key findings.
Donna Parent is the Chief Marketing Officer (CMO) at Dynamo Software. Donna is responsible for the corporate brand, demand generation strategies, and go-to-market initiatives for promoting Dynamo’s end-to-end cloud-based platform to the alternatives ecosystem. She is focused on fueling lifelong relationships with consumers, businesses, and strategic partners. Connect with Donna on LinkedIn.