In a recent survey of 111 limited partners, they were asked to rank their teams’ investment process performance. A sizable 77 per cent chose to characterize that performance as less than excellent. Eleven per cent even went so far as to rank performance as poor.
The performance perceptions expressed in the survey, which was conducted by Dynamo Software and Northfield Information Services in Q4 2022, are understandable. The workflows of nearly every type of organization have been recently impacted by the massive disruptions of hybrid work, a volatile world economy and the unprecedented turnover of human resources.
Yet, participating LPs also expressed optimism in the survey, indicating that a reenergized focus on technology will move them closer to operational excellence. More than half (51 per cent) of respondents, the majority of whom represent firms with more than $1 billion in assets under management, said they plan to increase their technology budgets in 2023.
Four strategic outcomes for LP fintech integration
Surveyed LPs indicated that their investment in fintech is aimed at four distinct outcomes:
Increased efficiencies: In light of the ongoing talent shortage and a potential recession, it’s critical that LPs address inefficient and slow processes that lead to wasted time and resources. To achieve their efficiency objectives, LPs indicated that they are searching for FinTech platforms that remove manual data tasks, like document collection and data extraction, to optimize productivity.
Optimized workflows: Optimizing workflows via automation is another goal for FinTech integration. Take for example software that automatically updates a fund’s pipeline status when a team member digitally submits an investment committee recommendation. Or software that sends auto-reminders to manager meeting participants to collect and collate their notes into a single summary. Removing friction from even small, everyday to-do lists compounds over time, freeing up time for more strategic tasks.
Whole-team empowerment: To empower entire teams to use technology, LPs are looking for software solutions that enable users to manage complex investment structures with full look-through capabilities. For example, LPs require the ability to improve their analysis across multiple investment vehicles, such as funds, co-investments, directs and secondaries, as well as across investment levels (e.g., portfolio, funds, holdings).
Fully integrated platform: LPs want connected, rather than siloed, technology systems. Such integration gives their people access to the latest advances in FinTech, plus a centralized and single-source view. Teams feel more confident in the outcomes of critical processes, like research and portfolio management, as well as the accuracy of data and analytics.
These four outcomes are especially important as investors look to increase their allocations to alternative investments, an intent declared by 55 per cent of survey respondents.
Three key processes
In terms of which aspects of the investment process LPs are hoping FinTech will improve, three rose to the top of the priority list among respondents:
1. Portfolio management;
2. Data automation; and
3. Exposure analysis.
Effectively managing the portfolio, maximizing investment data and mitigating risk through exposure analysis are critical outcomes for LPs. Therefore, any FinTech relied on to accomplish these tasks becomes mission critical, especially in today’s investing environment.
Fully informed investing, a strategic imperative for many LPs in 2023, is much more plausible among LPs that can focus on core competencies – a result of offloading lesser value and data-intensive tasks to fintech. Similarly, operational agility – a necessity in times of uncertainty – is helped along by iteratively optimized workflows and dynamic tools. As LPs perform allocation planning on their increasingly diverse and complex portfolios, incorporating projections based on up-to-date data and leading methodologies becomes a must.
A smoother road
The integration of new technology is likely to be smoother in 2023 than at any other time in history. Due to the digital transformation accelerated by Covid-19, the alternative investments industry is no stranger to rapid technology onboarding. Undoubtedly, the 35 per cent of LPs in the Dynamo-Northfield survey who said new-tech adoption was the biggest impact of the shift to remote work will strive to build on their lessons learned.
Against this backdrop, we’ve seen LP expectations for tech-enabled decision-making evolve quickly and dramatically. Data-rich investment dashboards with comprehensive and transparent analytics are excellent examples of the demand for automated solutions to complement the expertise of team members.
The future, although always uncertain, is bright for savvy investment professionals who adopt technologies that enable them to focus on their core competencies. Combining the speed and efficiency of machines with human talent for balancing risk and reward can move LPs closer to process excellence and keep them on track with their investment objectives for 2023 and beyond.
Matt Keller is VP of Product at Dynamo Software. Matt leads Dynamo’s Limited Partner vertical through product strategy, roadmap definition, client education, and sales engineering. Matt has nearly 20 years of experience partnering with alternative asset allocators and investors to deliver innovative financial technology solutions.
This article was first featured in Family Wealth Report on January 27, 2023.