Evening Brief – 02.23.24
Rebalancing of Power
A survey of General Partners (GPs) and asset managers found that economic instability and recessionary fears are having less of an influence on their overall company and alternative investment strategies.
In a surprising turn, financial volatility is less likely to impact GP’s decision-making on whether to raise a fund, according to the 2024 Dynamo Frontline Insight Report: Trends, Challenges and Insights from Global General Partners conducted by Boston-based alternatives software provider Dynamo Software.
Whereas the outlook initially appeared bleak, just a small percentage of GPs now report difficulty forecasting fundraising efforts compared to the prior year. In 2023, 33% of GPs said economic uncertainty made fundraising activity difficult to forecast. This decreased by 11 points in the most recent survey.
GPs also appear to sense a rebalancing of power in the LP-GP dynamic, Dynamo said, following a recession that never materialized and the potential for fund overperformance in 2024.
This renewed confidence is reflected in the planned increase in management fees. According to Dynamo, when compared to 2023 respondents, a substantially higher number of 2024 survey participants said they will increase their management costs over the next 12 months, with 20% intending to boost fees this year versus only 5% last year.
Dynamo said expectations for higher fee income may have influenced how GPs answered other questions related to the cost of doing business. It was revealed that 92% of GPs planned to raise (50%) or maintain their current technology expenditure (42%).
Overall cost fell from third to fourth place on the list of most significant factors to consider when deploying new technology, while improving efficiencies and simplifying workflows remained the most important tech implementation factor.
Surprisingly, despite the hype around artificial intelligence and machine learning, GPs put the integration of these technologies last among their priorities.
“The fact that AI ranked lower than expected did not go unnoticed by our technologists,” Dynamo said. “We believe this may be a reflection of how GPs are thinking about AI overall. In our conversations with asset managers, AI is largely being considered for its impact on portfolio companies, not necessarily on GPs’ own productivity.”
According to the survey, most respondents intend to raise (43%) or retain (52%) direct investment allocations, while more unorthodox bets such as cryptocurrency look to be more appealing to general partners in 2024. Last year, no respondents stated they wanted to increase crypto investments, while this year, 7% said they would.
At the same time, 66% of respondents stated that they intend to stay concentrated on a particular asset class, such as private equity or hedge funds. Just over 25% plan to diversify across several asset classes.
A growing proportion of GPs are examining European opportunities, doubling from 11% in 2023. Plans for opportunities in Asia climbed from 4% last year to 8% this year. The impact of Europe’s H2 2023 recession on H1 2024 strategy discussions could sway these tendencies.