Understanding the mindset of a potential partner is really at the fulcrum for building a successful engagement. This is especially necessary during challenging financial times, when some firms tend to cling to traditional strategies while others prefer to innovate through the turbulence.
This is no different for fund managers and investors. General Partners (GPs) strive to understand asset allocation strategies, prioritization frameworks and the investment commitment levels of their Limited Partners (LPs). After all, LPs are their customers. Of course, the information flow is symmetrical, with LPs wanting similar types of insight and data on how their GP investment partners are approaching various investment opportunities. Additionally, they want to be able to slice and dice that data for insights by strategy, region, vertical, and company type, among many other cohorts.
To arm both GPs and LPs with such insights, our firm surveyed global leaders across the alternative investments landscape. The findings illuminate where the mindsets of GPs and LPs align, as well as where they diverge.
Misaligned alternatives predictions and plans
Among the most noteworthy findings was the misalignment between the expectations of some GPs and plans of most LPs for alternatives in 2023. Notably, 25 percent of GPs polled said they expected investors to reduce allocation to alternatives. However, LPs polled did not indicate plans to pull back from alternatives. In fact, 96 percent said they would either increase (55%) or maintain (41%) their allocation to alternatives in 2023.
The tough deal-making environment may be increasing the pessimism of some GPs, but the LP survey results are indicative of the long view this audience takes, hunting for opportunities through all economic conditions. They know that private markets today have a bigger, more diverse pool of opportunities than public equities. And, during a recession, alternatives have historically outperformed due to a greater ability to strategically leverage bear cycles.
Where in the world GPs, LPs will invest
In terms of where most capital is expected to go, GPs and LPs largely agreed they would be mainly focused on American and Canadian opportunities in 2023. A slight contrast showed up when asked about primacy within the Asian marketplace. Whereas 12 percent of LPs are looking to deploy capital primarily in Asia, just 4 percent of GPs said the same. The Middle East/Africa did not rank at all with LPs; with GPs, however, the region earned about a 3 percent capture.
When asked how their investment strategies will change over the next 12 months, the majority of GP respondents (68%) said that they would focus on a single asset class. At 83 percent, a larger majority of smaller GPs, specifically those considering themselves part of the Emerging Managers segment, indicated the same.
Fintech among the solutions to efficiency
Perhaps not surprising in a down economy, GPs appear to be gearing up to root out opportunities for increased efficiency. What’s more, they are relying largely on tech to achieve higher levels of productivity. A full 94 percent of GPs said their technology budgets would either increase (45%) or stay the same (49%). Emerging Managers are even more committed to technology solutions, with 51 percent indicating they plan to boost tech spending. The sentiment among LPs was nearly identical to that of GPs, with 43 percent intending to leave their tech budgets alone and 51 percent planning to spend even more on tech solutions in 2023.
There is, however, a slight difference in prioritization between GP and LP leaders as they bring new technology solutions on board. GPs ranked cost as one of the top-three most important aspects to implementing technology. Also concerned with expense, but seemingly not as much as improved efficiency, Emerging Mangers ranked cost second behind optimized workflows. Interestingly, cost did not rank at all within LPs’ top-three. Rather, optimized workflows, API compatibility and empowering the whole team to use the technology comprised LPs’ top priorities when selecting and onboarding new fintech.
As GPs optimize, scale and integrate different fintech solutions, it will be important to keep LP priorities in mind. If the tech systems GPs implement don’t bring value to the overall infrastructure and tech stack —because they are not API friendly or they do not scale easily across all users and departments — sharing critical data and insights may be hindered to the point that LPs lose trust in the overall investment management.
When it came to the type of technology solutions GPs and LPs are focused on, LPs indicated plans to integrate tech that is largely within the following categories: portfolio management systems, data automation and exposure analysis.
The three solutions that received the most votes for future inclusion in the Emerging Manager tech stack were fundraising and marketing solutions, deal management/CRM and investor relations solutions. Larger GPs responded similarly, albeit by replacing an interest in fundraising and marketing with a focus on portfolio monitoring and valuation solutions.
ESG data incorporated into all-encompassing business strategies
As GPs and LPs evaluate fintech and data automation use cases, tracking sustainability and other values-based metrics is clearly on the minds of the respondents to three Dynamo surveys. The majority of GPs (52%) and a significant number of Emerging Managers (43%) surveyed by Dynamo anticipated investors will increase their ESG and DEI reporting expectations over the next 12 months. To drive helpful and fair due diligence, both LPs and GPs will continue to focus on wrapping meaningful data into any core analysis of their investment decisions.
At least for Emerging Managers, this may be due to the type of investor these firms are finding success with, beyond go-to institutional investors. Over the last 12 months, a significant number of Emerging Managers raised the most capital from the private wealth segment, with 32 percent raising the most from high-net-worth individuals and 21 percent raising the most from family offices.
Although less burdened by fiduciary pressures, private investors still must measure progress against targets. These targets increasingly include non-financial metrics. Family offices, especially, are eager for data to demonstrate the success of their ESG- and DEI-focused investments.
Focus on workflows for enhanced efficiency
As for operational challenges and opportunities, LPs indicated they would focus on three priorities:
- No. 1: Removing manual data tasks and introducing automated workflows.
- No. 2: Optimizing team productivity and workflow efficiencies.
- No. 3: Better enabling team members to manage new investment structures.
Naturally, GPs had different process-related priorities for their firms. However, it’s interesting to note that both LPs and GPs shared an intention to focus on workflows in 2023, specifically by integrating automation and making processes more efficient overall. GPs polled selected these three strategies as their top priorities for 2023:
- No. 1: Protecting and maximizing the value of the portfolio.
- No. 2: Removing manual data tasks and introducing automated workflows.
- No. 3: Optimizing team productivity and workflow efficiencies.
In the challenging and valiant pursuit of alpha, both GPs and LPs are pressing aggressively on growth. They are not held captive by the market’s ebbs and flows; rather, they are hunkering down, focusing for now on optimizing their own internal operations, and assuming the best position to execute as new opportunities arise.
