In Growing Private Markets, Those Who Can Scale Will Win

Current headwinds notwithstanding, private markets are predicted to see continued growth for the foreseeable future, and the trend is making operational scale a top priority for all concerned, including general partners (GPs) and limited partners (LPs).

Between a growing number of companies choosing to delist or stay private, the rising number of high-net-worth individuals and the enduring positive perception of private markets performance, alternative asset classes are poised for significant growth. Indeed, recent research by MergerMarket, commissioned by S&P Global Market Intelligence, found that two-thirds of asset managers believe "deal activity will increase in 2024 compared to the previous year."

Megafunds, meta-challenges

But this is a good-news story with a catch, because many firms are not ready to take advantage of the continued growth of private markets. Yes, they have established processes for the fundamental stages in the investment lifecycle, including fundraising, portfolio management and reporting. But, in many cases, these processes are highly manual in nature — they are not built on a technology platform that is capable of supporting rapid growth.

That ability to scale is the meta-challenge for alternative asset managers — the challenge that hides beneath all others. Because whatever firms are doing today — whether that's doing a deal, raising and managing a fund, or deploying capital — the looming question is: "Can you do it 10x? What about 100x?"

"Scaling up systems has been a challenge," notes the managing director of a private debt firm in the US, who was interviewed as part of research for a MergerMarket report on outsourcing trends. "Over time, newer talent has been engaged to manage processes, and it takes time for them to assess codes and functionalities of older systems. Even with document availability, there are time management challenges to consider."

The rise of the hyperscaler

We are starting to see "hyperscalers" emerge in private markets — top-tier players that are capable of raising a single fund the size of a mid-sized firm's entire business. The gap between the hyperscalers and the rest of the pack is only going to widen in the future, and those that are not thinking about the scalability of their systems and processes today will be lapped by the competition tomorrow.

The emergence of digital-driven disruptors is also a challenge, as noted by the COO of a French fund-of-funds who was interviewed for the outsourcing report. "There are newer organizations that are digitally driven, and they might disrupt investment choices, asset class selections, and investor attitudes."

In such a context, it is no longer tenable for firms to operate like artisanal cheesemakers, focusing huge amounts of resources on individual tasks. To succeed amid evolving market dynamics, they must embrace scale.

The technology imperative

The rapid development and integration of AI into private markets workflows has the potential to exponentially increase operational scale. AI is already opening up astonishing new capabilities and accelerating the pace at which asset owners and managers can create and implement new tools. AI is supporting in areas that previous technologies weren't able to touch. While fund management technology has so far been focused primarily on middle- and back-office operations, AI is enabling firms to scale up in areas such as deal sourcing and due diligence.

Our solutions and services are harnessing the potential of AI. For example, our iLEVEL portfolio monitoring platform is using AI to collect a wide range of client portfolio data at scale. The platform automates the collection, centralization, and normalization of critical information that firms need to scale, creating a centralized repository that drives portfolio monitoring, analytics, valuation, and reporting on-platform.

Before AI, unstructured data sources, such as financial tables buried in an annual report, would need to be entered into the system via managed services. Now, a new, AI-powered feature can scrape and normalize data from unstructured sources in seconds to drive higher-velocity portfolio monitoring. We are building on this platform by rolling out the use of AI to streamline other aspects of the workflow, such as data ingestion.

Optimizing your workflow

As GPs and LPs look to gain a competitive edge, there are some key areas where the ability to scale will be crucial whether it is powered by AI or other advanced technologies:

- Fundraising: Fundraising is the oil that lubricates and accelerates everything. There's only so much capital to go around, so firms that can scale the fundraising process will secure the capital they need, raise it faster, and launch their next fund sooner. Conversely, the firm that isn't constantly launching its next fund will quickly devolve into a zombie.

- Capital deployment: If you can deploy your capital into high-quality places, you can surge ahead of the competition, moving on to your next fundraise while they are still figuring out how to put their money to work. Deploying capital is an incredibly complex and high-risk activity: how will your firm balance speed and diligence when you're deploying significantly more?

- Operations: The day-to-day operational management of the fund is time consuming. Sending out capital calls and distributions, syncing up with your accounting systems, getting letters out: these are labor-intensive activities that are always in motion. How will you manage them across a multi-billion-dollar fund?

- Transparency: It is essential for asset owners to maintain visibility of their holdings across multiple funds. How will you maintain a clear view of your holdings as you ramp up your allocations to alternative? And will you be able to get a consolidated view of your holdings across public and private assets?

- Asset Management: Analyzing the performance of a private investment is complicated by the unstandardized nature of the data. How much time can you afford to spend manually collating and managing the data? And is there any competitive benefit to doing so manually?

- Portfolio and Risk Management: While managing a private investment is complex, the challenge is multiplied several times over when it comes to monitoring and managing the exposures, risk, and performance of an entire portfolio. Automating the most labor-intensive parts of this workflow creates huge operational efficiencies that allow firms to continue growing.

We are empowering diverse private markets participants to achieve scale throughout the investment lifecycle, including the areas listed above, using our unique combination of software, services, data and expertise. This means focusing on reducing the friction of reporting between portfolio assets and sponsors, and from sponsors to investors. By maximizing data capture from standard reports, we enable clients to spend their time and energy on analysis and decision-making.

Success in private markets will always rely on insight and strategy. Technology will never replace those human elements. But with hyperscaled opportunities and competition on the horizon, successful asset owners and managers will need to find ways to support those differentiators at scale—or risk losing out to firms that can.

Learn more about our software, services and data for private markets here.

Learn more our iLEVEL portfolio monitoring solution and iLEVEL Managed Data Services here.