How Private Markets GPs Can Improve Their Data Management

July 12, 2021

Firms can be more efficient and better informed if they improve their data management. If they do not, they may get left behind and lose clients. We discuss the best way to make their data better.

When it comes to data management, private markets firms are the laggards of the investment industry.

Many firms are still living in an Excel world where data is produced manually rather than automatically. Data management is also fragmented. Because its importance has historically been underplayed, firms may lack the appropriate technology and expertise to lead these processes. As a result, firms have been home to a hodgepodge of unconnected systems. The accounting team has chosen the accounting system, the portfolio management team the portfolio management system, and so on.

This lack of sophistication and connectedness has made data management labor-intensive and time-consuming. In particular, because each department has its own system, data must be dredged up manually from one system to put into another. Consider someone in investor relations receiving a client request to analyze data in a non-standard way. All too often, they have to wait for the finance department to enter the data, talk to a contact in finance, and wait for the finance person to put it together and send it over. By this time, of course, the data is already out of date.

This way of operating is no longer satisfactory, for two reasons.

1. Limited partners want more

Limited partners (LPs) are leading the charge. Large institutional investors want even more detailed data, often in customized form. They have especially ramped up their expectations for ESG data since early 2020. They also want the data to be up to date and supplied in a user-friendly way. For example, some of our private equity clients receive requests from their own clients for direct API feeds from their investor portals. These allow LPs to drill down into underlying financial data rather than having to rely on investor services to put all this together. This pressure is rising up partly because LPs’ own data systems are becoming better, allowing them to do more with the data they receive from general partners (GPs). It is also because data provided by other parts of the investment management industry is improving rapidly. The data-management gap between private markets firms and the rest of the industry is becoming so large that it cannot be sustained. Limited partners’ expectations have been raised so high by other types of investment managers that the approach of private markets firms is no longer tenable.

“Large institutional investors want even more detailed data, often in customized form.”

Over the next five years, we expect the quality of private markets firms’ data management to become a key part of the due diligence process when investors choose which firm to invest with. It will, in some cases, become a differentiating factor that decides which firm gets the mandate.

2. General partners need more

GPs’ internal investment teams want better, clearer and more up-to-date data so they can perform their duties better. This allows them to conduct better diligence on their deals and generate a better analysis of how to achieve value creation for their existing portfolio companies.

The pandemic has accentuated this desire. Investment professionals are operating virtually. They cannot meet founders and executives in-person to appraise how a business is doing, so they need the data to tell the story for them. This has made them more reliant on data than ever.

How can GPs improve their data management?

We have a few tips:

1. Devise an overall strategy

Clients often approach data management by putting out fires: they have an immediate and pressing problem getting particular data in one narrow area, so they think just of dealing with that immediate problem. We believe this is short-sighted. Instead, clients need to think more holistically. They should start with the far horizon: what is the end goal? Do I have the right technology in place to achieve my overall strategic directive?

2. Identify where you can make the biggest impact

If large numbers of people in various parts of the business are complaining that a specific data management task is crucial but also complex and cumbersome, the firm should focus on this. It pays to work out how much time and expense this process takes up, and how much time and expense it would take to make it better. Take, by contrast, a minor data management problem that a single department finds irritating but not a major headache that takes up major resources. This is worth solving, but is not the top priority issue that needs addressing first. Sometimes there are super-complex problems that would take a lot of resources to solve, but with only a small return at the end.

3. Start small

Private markets firms need to distinguish between strategy and execution. It pays to have a big-picture strategy from the beginning, but to implement this in a piecemeal way. Break up the strategy into bite-sized pieces and deal with one piece at a time. That enables the GP to learn lessons from each phase, which can be applied to the following phase, until eventually, a tried-and-tested approach to data management is in place. There will certainly be lessons to be absorbed because the way the firm goes about solving the first task will always be at least slightly off the mark. This means that if the GP tries to implement the whole strategy in one big bang, the implementation of the whole strategy will always be at least slightly wrong; this creates the risk that the strategy fails to solve the problems it was devised to address. Because it is more efficient, a piecemeal approach will save time and money and keep stakeholders on board. By contrast, a big bang execution will be expensive and labor intensive, and could alienate stakeholders.

“Break up the strategy into bite-sized pieces and deal with one piece at a time.”

Private markets firms need patience. A piecemeal approach to implementing the strategy can take as long as a year – but that will be a year well spent.

The benefits of better data management

If a firm makes its data management the best it can practicably be by following these precepts, what are the benefits? We see two:

1. Efficiency

By moving from clunky manual processes to smooth automated processes, the firm saves labor, and therefore cost, in the back and middle offices. Data can also be generated and analyzed in real-time, allowing for better decision-making based on more accurate data.

2. Democratization

Historically, specific data sets would be the province of specific departments. However, a better data system allows people in every department to see all the data: it is no longer siloed. With a good data management system, the data can easily be sliced and diced and understood through sophisticated visualization tools, including charts and graphs – all available through just a few clicks. To return to the example of IRRs and the finance department, it no longer takes a week to get the finance department to produce a chart showing IRR trends for the firm’s fund. Instead, investment managers can do this themselves, with ease – and with the assurance that the data is correct because they can see it for themselves in the database.

Crucially, this democratization improves the flow of information to the front office, allowing investment managers to make more informed decisions. It also allows different departments to take their own approach to the data. They can create their own spin-offs from the main report that is served up to senior management. They can even create and track their own key performance indicators based on the data.

As in political democracies, data democracies also generate discussion that adds value – many database platforms allow people to add in-screen comments. As in national democracies, too, it reduces the chance of error because anyone can see a change in the data and speak up if they think this has introduced a mistake.

Case study: from chaos to order

A client had 15 years plus of financial data in Excel files scattered across random folders on various drives throughout its network. It engaged us to transfer all the data to Snowflake, a cloud-based database. We moved all the data and re-engineered processes to ensure that all future data received was uploaded appropriately to the database in real-time.

We then looked at the reporting. Under the previous system, this took the form of a 20-page PowerPoint slide deck, based on Excel and HTML data, which was delivered to senior management once a week after a great amount of effort. We moved this data to a Tableau environment where it could be visualized through graphics, was interactive, and was available anywhere to anyone with a desktop tablet or mobile phone. Reporting was also no longer just weekly – the data was updated in real-time. In just a few clicks, anyone could slice and dice the data appropriately, using filters with date ranges, industry selectors and region identifiers.

Can firms go it alone?

Private markets firms may consider improving their data management on their own. This is possible, but we recommend they turn to a specialist for three reasons:

1. Objectivity

A specialist can help you make better decisions by offering an outsider’s perspective. Different teams within a private markets firm will have different views on what the pressing problems are and how to solve them. This includes the team tasked with improving data management, which may make decisions based too much on its own particular perspective. The finance team may, for example, choose for the whole firm a data software system that is the best system only for the finance function. Data management can, in our experience, be a surprisingly contentious issue within organizations.

“A specialist can help you make better decisions by offering an outsider’s perspective.”

Firms will also often fail to understand hidden interdependencies of data, which generate unintended consequences in Place B when data in Place A is altered.

At Lionpoint, we can guide you through the process of devising a strategy and then implementing it, so that you do not head off on the wrong course, get lost in the details, or unwittingly create fresh problems. We do this by taking a step back and looking at the whole picture.

2. Resource

Most private markets firms are small. They have small operational and IT teams, who are kept busy in their day jobs. The IT people are usually also generalists, without expertise in improving data management. Because they are stretched thin, IT teams must spend all their time on taking what they have and making just about work, day to day. They lack the time to think about how to improve systems in the long term. Lionpoint, however, has the resource to do this, including specialist teams.

3. Experience

No data management problem faced by a private markets firm is unique to that firm. In other words, we have seen most problems before, because of our long experience in this field. For example, many firms have broadly similar issues in pulling data out to do quarterly reports. We can provide insights based on our previous work for your peers and avoid pitfalls we are aware of from previous projects for other clients.

Lionpoint’s Data Management Offering

Our Data Management team includes experts in business operations, IT and data. It is ready to help clients create an integrated data system across the organization, from extracting and coordinating the data all the way through to reporting and value creation through business intelligence.

We begin by talking to people throughout the firm to gain a good understanding of the data-management technology, the types of reporting required, and the way data flows through the organization. That includes how manual and how efficient it is. We can then help devise a strategy and guide the firm on the journey to execute this strategy. The Data Management team can also provide ongoing advice on a firm’s data management after the strategy is implemented. Ultimately, our goal is to guide you on strategy and execution, using frameworks proven as effective in bringing enterprise data management to life, so that you can fulfill your vision of being the best private markets manager you can be.