LPs Plan to Invest More in Private Equity and Debt

Limited partners plan to invest more money in private equity and debt funds and are betting on attractive returns from these investments, according to an Intralinks LP survey presented at SS&C Technologies’ Deliver 2023 conference in Austin, held Oct. 22-24. Out of 251 LPs surveyed, 48% said they plan to increase their allocations to alternative investments in the next 12 months, 44% said they’d keep allocations the same and only 9% said they’d decrease the amount.

A majority of LPs also said returns from alternative investments exceeded expectations (20%) or were in line with expectations (57%). At 51%, most said private equity delivered the best risk-adjusted returns, followed by private debt at 29%. Many of the LPs surveyed said private credit will play a bigger role in alternative investing going forward, with banks having retrenched in middle-market lending, while high interest rates and low defaults so far could lead to high returns for these funds. A majority of respondents (34%) also said they plan to increase their allocations to alternatives by 10% or more.

As alternative allocations grow and become more complex, it’s also getting harder to track all the fund investments, performance, underlying holdings or potential red flags. Most investors in the survey (62%) said they wanted better report analytics from their GPs and 53% said they wanted more frequent conversations with portfolio managers. “Partnering with the right GPs has never been more important as LPs navigate ongoing turbulence and the prospect of long-term volatility,” the survey said.

To that end, Intralinks, the M&A and fundraising data arm of fintech giant SS&C, recently launched a new planform called InView. The product is an LP portal that investors can use to aggregate information about their fund investments, performance and other details. “We’ve made a major investment in investor portals for the next phase of fund reporting in alternatives,” said Bob Petrocchi, senior vice president and co-general manager of SS&C Intralinks in an interview at the annual Deliver conference. The InView portal leverages modern tools, including AI capabilities, to ensure streamlined data flows for institutional investors.

“We’re seeing more interest from LPs to provide information on investments quicker, more efficiently and more frequently,” said Noreen Crowe, vice president of product management for alternative investments at Intralinks.

Lengthy Timelines

While data, analytics and automation are getting more advanced, both fundraising and auction processes are taking longer than usual right now because of market headwinds, SS&C executives said. In these situations, the abundance of data can be both a blessing and a curse.

We have seen the diligence process taking longer on average, part of that is because there is more data available to buyers and sellers

Bob Petrocchi

SS&C Intralinks

“We have seen the diligence process taking longer on average, part of that is because there is more data available to buyers and sellers,” said Petrocchi. In the past, year “we saw a spike in deals that didn’t launch or didn’t complete,” he said.

“In these extended deals, potential buyers would demand updated financial statements from sellers. We can help buyers identify content that needs to be refreshed when there is a million + pages of content in a data room,” said Ken Bisconti, senior vice president and co-general manager of Intralinks, which hosts data rooms for companies going through an auction process.

Meghan McAlpine, senior director of strategy and product marketing at Intralinks, added that quality of earnings reports are becoming a standard in sale processes, with sellers “verifying what the numbers look like with external parties becoming a priority before they go into a process.”

On the fundraising front, Intralinks executives are also seeing the process take longer than usual: with the timeline extended to about 18-24 months as opposed to what was usually 12-15 months, according to Andrew Hoemann, global head of alternative investments at SS&C Intralinks.

Many placement agents have shifted their focus to fundraising for continuation funds, he said. According to Intralinks’ LP survey, 68% of LPs polled had been offered a continuation fund in the past year. Investors are also showing more interest in private debt and infrastructure funds, and less in hedge funds, SS&C executives said. Investors are playing it safe and preferring to invest with established managers, unless new funds are coming from some big names in the business. “The experience part is huge if they’re spinning out from a large organization,” said McAlpine.

Tapping the Retail Channel

SS&C executives also said they’ve seen a convergence in alternative investments between liquid and illiquid strategies and retail and institutional products, with many firms wanting to offer several types of funds to a variety of investors.

“The desire from all sorts of investment managers—hedge funds and private markets managers—is to tap a source of capital they don’t have today,” said Bhagesh Malde, global head of SS&C GlobeOp, the firm’s fund administration platform. He says fund managers of all stripes are busy designing products for retail investors. “If your average private equity fund has dozens of investors, a retail (private equity) fund could have 1,000+ investors, with typically 100 new investors added each month,” he said.

At the same time, the cost of acquiring and onboarding each investor are high and firms need technology tools to bring on investors smoothly. Going after retail clients will likely involve more scrutiny and transparency on terms, fees and other disclosures. “The investment manager and their institutional investors: they’re big boys and big girls, but if they’re going after more retail investors, it’ll invite more regulations and scrutiny,” Malde said.

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SS&C Blue Prism, which develops intelligent enterprise automation software, has risk and compliance services as its most popular use case. “Regulators have a lot of requirements for businesses to fully comply with regulations, we see a huge amount of use in risk and compliance,” said Mike Megaw, managing director in intelligent automation at SS&C. Examples are anti-money laundering programs, high-volume transactions, accounts reconciliations, KYC (know your customer) standards, onboarding or leaving employees and quality control, among others. Blue Prism’s offerings help clients turn over some of these processes to what they call “digital workers,” software designed to work on a specific task. “You can do it faster and do more of it with digital workers,” Megaw said.

SS&C’s Deliver conference hosted about 1000 clients among private equity and debt executives, hedge fund managers, banks, insurers and others at the JW Marriott hotel in Austin Oct. 22-24. The event featured panels on multiple tracks including private markets, asset management, wealth management, insurance and hedge funds. Clients and prospects were also able to trial SS&C’s products at various “labs” set-up throughout the event space. Country band LoCash closed out the conference at a dinner on October 24. The same event will be held in New Orleans next year.

Anastasia Donde is Middle Market Growth’s senior editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.