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In the beginning…
…there were envelopes, stamps and the U.S. Postal Service to send out notices and statements to LPs. Not quite efficient nor cost effective, but it worked. Then came email, and investor’s inboxes became full of attachments that had to be download and organized somehow to keep track of all their fund managers correspondences. And email lived on for many years, until hacking tools progressed to the point where sending sensitive information using email became a very bad idea. The other realization was that using email to send attachments added little value in establishing goodwill with LPs. Why?
Because the GP, in a sense, puts the onus on the LP to manage all the capital account, K-1s, capital calls, financials and distribution notices that they get from all their fund managers. (LPs, for their part, have made an art form using File Explorer and network drives to keep track of it all.) And so, in an attempt to do more of the heavy lifting for their investors, the Investor Portal was born.
While the concept of what comprises an “investor portal” is a bit amorphous, its general concept – a web-based interface that allows investors to capture relevant information – has been well received by the LP community. In fact, according to a recent survey, LPs prefer to receive their information via an investor portal. For the most part, this means replacing an LP’s internal server based file system to a GP-based cloud platform so that documents and notices can be accessed via a browser in an organized manner. Sometimes a GP can add some private-label elements to the site to re-enforce branding and messaging. Many of these first-generation portals have been dubbed Virtual Data Rooms or VDRs, and many are still used as an initial email replacement. The trouble is, though, that LP expectations for how they want to communicate with their GPs has moved beyond what a VDR can handle. Way beyond. LPs have been pounding the table for more transparency from their alternative investment managers – both hedge and private capital. There isn’t a day that goes by without some survey extoling the fact that LPs want more. Not more documents, more insight, and this is where the typical VDR (and other file syncing applications like Box and Dropbox) fall short. Not providing investors with better tools with which to 1) glean insights into their investments and 2) provide them the ability to download data, is quickly being frowned upon in the LP community. Moving PDFs to a file system in the cloud via a portal has been a step in the right direction (vs email) but providing an analytical and data-centric platform for LPs (custom branded of course) is what’s really going to fuel investor goodwill. PDF/document-only methods of communicating with investors ultimately forces them into the proverbial “re-keying” of cash flows and valuations into their own spreadsheets or systems. The problems with this for LPs are numerous, with time and accuracy being the most obvious.
In talking to the CIO of a large insurance company ($2 bil PE portfolio) he recently told me: “Being able to download data right from a chart or table in a portal is much more helpful to us than having to download a document and re-entering the data in our system. It’s a complete waste of time.” I suspect many LPs don’t echo that sentiment out loud that much as they are pretty much numb to the pain of it all. Once LPs begin to have access to the type of tools normally reserved for their marketable securities, though, one can image document-centric VDRs will start to become passed over for the type of experience a LP can have with a full-featured investor portal.
It seems both GPs and LPs agree that email as a LP reporting tool has passed its shelf life. VDRs, while incrementally better, also seem to have run their course. With headlines screaming about record dry powder and high valuations, investors can be excused for being a bit nervous, and when investors are nervous, they ask questions. A lot of questions. For GPs, staying ahead of the communication curve in the coming years is going to be awfully important.