Evening Brief – 10.27.23 

LPs Want Transparency 

Investors expect to increase their allocations to private debt and private equity over the next 12 months, according to alternative investment technology giant SS&C Technologies Holdings. And that translates into more growth within the artificial intelligence (AI) realm. 

According to SS&C’s first annual Emerging Manager report, Embracing the New, which surveyed 80 LPs and 63 GPs, the likelihood of investors making new allocations to emerging managers in the next 12 months is very low, but newer managers are already in most allocators’ portfolios. 

Approximately 88% of LPs stated that they are searching for higher alpha opportunities, with 70% focused on unique strategy sets through emerging manager allocations. Approximately 65% of LPs prefer private market investments. 

GPs acknowledge a difficult fundraising environment, although the majority want to focus on established markets in North America and the EU. 

“Despite a persistently difficult environment for fundraising, more than two-thirds of GPs and LPs we surveyed are invested with emerging managers and continue to see opportunities in the segment,” said Bhagesh Malde, head of SS&C GlobeOp, the fund operations unit which has more than $2 trillion in private market assets under administration. 

Malde said SS&C is now testing new investor reporting tools with clients to establish a transparency standard, since the new SEC guidelines for private fund advisors focus on management openness and investor communications.   

While compliance teams will scrutinize quarterly disclosures and any conflicts of interest, emerging managers will be more inclined to scrutinize side letter disclosures, as newer managers have generally offered fee and other incentives to early investors. 

More than half of emerging managers polled mentioned time and resource constraints, and almost 70% said their operational infrastructure need improvement. According to the report, efficiency and automation to eliminate manual labor (69%) outweigh cost savings (27%). Meanwhile, 60% of GPs claim they are utilizing AI in their practice to create efficiency advantages, with 20% experimenting with or deploying it.   

The capacity to provide transparency to LPs is, nonetheless, top of mind for both emerging manager investors and established GPs. Most investors prioritized team competence and complementary skill sets, followed by transparency and quality of reporting, and fund terms and fee structures.