The Data-driven Portfolio – How LPs Can Make Smarter, Faster Investment Decisions

By: Paymun Saket

Managing Director - LP Products
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Investing in the private markets has always enjoyed broad appeal among investors who seek returns not tied to the public markets. As of year end 2019, global assets in private market funds hit US$6.5 trillion, a 170% increase over the previous 10 years, and a 10% increase for 2019 alone, according to a February 2020 report by McKinsey & Company. By comparison, assets in global public markets rose about 100% in that period.1,2

For LPs with alternative assets in their portfolios, tracking portfolio investments, monitoring risk, and evaluating performance are important parts of maintaining their private equity portfolio. All LPs, regardless of what they invest in, need to be able to analyze exposure across assets, make future allocations to GPs, calculate returns, and generate reports for use by their internal teams.

With the inherent complexity in LP portfolios, which often contain multiple alternative asset classes, using Excel or maintaining multiple disparate solutions to execute these functions can frequently lead to data inefficiencies.

Multiple portfolio management solutions, stitched together from different providers, can prove to be costly in the long run and result in a disjointed user experience. LPs who are unable to aggregate data across their multi-asset portfolios may find:

Data, Data Everywhere

The Importance of Centralizing Your Portfolio Data

For LPs using Excel as the primary method of managing their portfolio, the possibility of manual error and the application’s lack of flexibility for team collaboration presents a challenge to maintaining an alternative investments portfolio. For teams utilizing multi-product solutions from disparate providers, this type of arrangement presents its own set of issues. This is because multi-product solutions prevent portfolio data from being centralized; each of the teams working for the limited partnership uses different types of data. In order for them to be able to work off the same set of numbers, the LP must maintain system connectivity by creating pipelines between them. Because all of these different systems need to be kept synchronized, LPs spend a lot of time and effort just managing them.

Now, with LPs facing increased market volatility, COVID challenges, and a rapidly-evolving investment landscape, it’s more important than ever that they have control of their data. The ability to determine their exposure to different industries, geographies, and asset classes, as well as being able to accurately determine asset allocation is directly tied to having access to data and being able to rely on that data. And with staffing and budgetary constraints, it’s crucial that small and mid-size LPs allocate their resources wisely.

In the public markets determining asset allocation is easy to do, unlike the private markets, which don’t have the proper tools. But in this current era of especial investment challenges, lack of data access is a more acute problem due to increased allocations in alternative investments; knowing where you are and where you’re going — from an allocation perspective — is critical. And having a single source of truth is the best way to monitor allocations.

Disparate Issues, Common Goals

LPs who invest in alternative markets need an all-in-one solution that is not only able to handle multiple alternative asset classes, but one that can manage front, middle, and back office functions in a single instance. Each of these teams has unique needs, and they all work together so that the LP can effectively shepherd investments from deal stage to maturity:

Multi Asset Class Portfolios Require a Multi Asset Solution

This increased growth into alternative asset classes such as private equity real estate, private debt, and secondaries is part of a portfolio diversification plan increasingly utilized by LPs. Further diversification across managers, strategies, regions, industries, and vintage years requires a robust solution that can manage multiple complex investment types. With many providers focused on providing a solution for a single alternative asset class, this leaves LPs in the same boat — no single source of data across all asset classes in their portfolio. Without a way to integrate multiple alternative asset classes into a single instance, LPs only have a partial solution.

A Better Way

Incorporating a Full Service Solution Into Your LP Workflow

For LPs wishing to replace Excel or eliminate their dependence on various disparate software instances, a full-service solution that is asset class agnostic and brings together all related investment activities will help them make better and quicker investment decisions. Features that allow investors to centralize all of their core activities — tracking, reviewing, and analyzing their investments from deal stage all the way to maturity — along with a centralized data source, data entry, modelling capabilities, and reporting functions are what’s needed.

How Can LPs Make the Most of these Features?

Reduced workflow will allow LPs to focus more on value added activities, improving their ability to invest and increasing their investment results, while data automation will eliminate errors that result from manual processes.

Allvue Systems’ LP Portfolio Management multi-asset, front-to-back solution has been designed to enhance LP investment decision-making. It empowers Limited Partners / Investors to perform front-, middle-, and back-office activities within a single unified environment. This solution blends functionalities of CRM, Deal Tracking and Analysis, Portfolio Management and Analysis, Reporting, and Investment Accounting into a single product. Utilizing the product’s robust analytical tool, LPs can monitor their investments and exposure across private equity, infrastructure, real estate, and private debt. LPs can explore new and current opportunities, map deals from start to finish, and evaluate their exposures and performance so they can make better and quicker investment decisions.

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1 https://www.barrons.com/articles/future-returns-private-markets-prove-resilient-01598383367

2 A new decade for private markets, McKinsey Global Private Markets Review 2020, https://www.mckinsey.com/~/media/mckinsey/industries/private%20equity%20and%20principal%20investors/our%20insights/mckinseys%20private%20markets%20annual%20review/mckinsey-global-private-markets-review-2020-v4.ashx