Once a physical space guarded by human security, the now virtual deal room is approaching a second wave of reinvention. Three market realities are driving a second wave of reinvention as young investors, market volatility and tech democratization make their marks on the deal-making process.
1. Digital Natives Nearing Workforce Domination
As digital natives make up a larger percentage of the investor ecosystem, expectations for communication are shifting. At 75% and 27% respectively, Millennials and Gen Z professionals will make up nearly the entire workforce by 2025.
Surrounded their whole lives by computers, digital devices, and social media, more junior limited partners (LPs) and asset allocators naturally expect due diligence information to be real-time, data-driven, and hyper-relevant to their individual investment goals.
What’s more, today’s investors expect digital communication to be two-way. It’s no longer enough to simply push information to an audience; that audience will want to also ask questions and share feedback.
Beyond purely digital expectations, Millennials and Gen Z individuals also want to feel alignment with a fund’s purpose or mission. According to a recent generational culture report, 83 percent of Millennials want companies to align with their values.
How this reality is reflected in the deal room
- Portal-like experience for anytime, anywhere engagement with performance metrics, ala online banking.
- Personalization components, such as configurable communication preferences, a dynamic table of contents, or the ability to filter, sort, and group information to an LP’s liking.
- More marketing-focused content, such as pitch decks with greater real estate devoted to passion and vision vs. track records and portfolio structures.
2. Market Volatility Cranks Up the Pressure
Following the Great Recession in 2008, LPs asserted a quick and swift demand for transparency. It’s a lesson learned many of us have held near and dear as we continue to evolve and improve.
There is a key workforce dynamic at play here, however. The lower average age of employees also means fewer of them have weathered a recession, at least professionally. While the U.S. has yet to fall into an official recession, high inflation and interest rate hikes have been creating a collective anxiety similar to that of ‘08. As asset allocators—both those newer to the profession and those more tenured—mount their defenses against market volatility, the pressure to develop a smart, diversified investment strategy is heightened.
Regulators and industry trade groups, too, will influence due diligence practices as they work to help the industry maneuver the economy’s unknowns. Take the recently released principles of professionalism from the Chartered Alternative Investment Analyst Association (CAIA), for example. The guidance placed a high value on transparency, citing “a voracious appetite for exposure to less liquid, more complex, idiosyncratic asset classes” among the most pressing issues facing the industry.
How this reality is reflected in the deal room
- Access to granular, real-time data, as well as functionality that allows investors to slice and dice either inside a system or via export to create their own analysis.
- Movement away from passive document storage to a two-way communication channel, with features like questionnaires and surveys, electronic signature integrations or investor-side doc uploading capabilities.
- For deal rooms with outbound mailing and notifications functionality, the addition of opt-out features to help GPs comply with global privacy regulations, such as GDPR.
3. Fintech Makes Imagination the Only Limitation
The rapid democratization of advanced technology is making virtual deal room innovation not only possible but inevitable. In fact, many believe the industry is mere minutes away from being able to perform the entire fundraising lifecycle right inside the deal room.
The influence of cloud computing and high-speed processing alone has dramatically changed the volume, velocity, and variety of data available to fund-raisers and investors alike. One can only imagine what is next. Quantum processing, 5G, edge computing, and metaverse technologies are sure to influence the way stakeholders engage with information.
How this reality is reflected in the deal room
- Interactive maps, drone footage, and other visual content providing a Zillow-like interface, particularly for real estate and property/land investments.
- Responsive design that makes engaging with deal room content on mobile screens not only possible but enjoyable.
- Legions of APIs for skies-the-limit widgets and third-party integrations, like outsourced due diligence providers and/or webinar-hosting services.
The virtual deal room is a dynamic sandbox for emerging managers to test out new methods and media for modernized communication and accelerating capital raising. With more digitally savvy employees in the ranks, a greater demand for transparency, and the technology to make it all happen, there’s no better time to push your deal room to the next level.
Darren North is a vice president with alternative investments FinTech Dynamo.
