Published by Jessica Weisman-Pitts
Posted on October 12, 2023
Automating the Investor Experience: A Win-Win for Private Funds—and for LPs
By Drake Paulson, VP, Head of Partnership and Client Experience, Anduin
A smooth subscription process is critical to private market relationships, especially given the current downturn in funding. Yet, manual compliance and onboarding processes are still prevalent at many firms. This not only creates tedious back-office work, it’s costly and ultimately slows down fund growth.
Meanwhile, some private equity firms are embracing automation to ease the work of General Partners (GPs) and improve the experience of investors in subscribing to a fund. Should additional aspects of the limited partner (LPs) relationship, like transfers, confirmations, and updates, also be covered by automation?
Private funds are increasingly saying, yes. The mutual gains are greater if both parties use automation in concert. Improving workflows between LPs and GPs accelerates deal flow, which in turn improves margins and returns. It also improves the investor experience significantly.
Luckily, we’re reaching a tipping point in funds’ willingness to modernize. GPs are quickly realizing that a poor investor experience hinders fund growth. And they understand digital transformation is inevitable given the growing number of LPs.
Ignoring automation can come at a cost
In the relative calm of this current funding phase, some GPs have quietly deployed automation for client-facing and back-office operations. Others—small and large funds alike—have been building out their IR and operations teams proactively, in expectation of a market upturn ahead.
But funds that plan to handle expansion by merely adding back-office personnel are just doubling down on manual methods. Scaling quickly to meet an influx of new investors will be difficult for them. Take compliance, for instance. Complying with regulatory changes on a dime—like tracking side-letter obligations and KYC/AML checks—will be hard to carry out without automation.
The reality is that both new [retail] and existing investors will be less tolerant of manual onboarding and ongoing interactions because they are conditioned to expect an efficient and more “consumerized’ customer experience. To them, legacy methods are anachronistic and may hurt a fund’s credibility in their eyes.
What about retail investors?
More high net worth individuals (HNWIs) are investing with private funds. They take smaller stakes than traditional private investors, and may require more ongoing communication and compliance interactions. They push up the average cost per dollar of investment. Automation should be part of any scaling plan because it helps protect margins as the funds’ total pie grows with the addition of smaller investors.
Fund managers also seek growth by branching out to offer multiple strategies, which often compete directly with longer-tenured investments from other managers. GPs realize that frictionless onboarding gives them an advantage with their existing investors, who would face more due diligence tedium if they pursued the new strategy with a different fund family.
Why automation matters to private investors
Digital transformation can boost a fund’s expansion, but what’s in it for the LP? Onboarding digitally in mere minutes at a new private fund is a novelty perk today, but it will become a baseline that investors expect. For LPs, though, it doesn’t stop there; automation is about more than saving an hour or two when signing up.
Each financial crisis or industry scandal tends to result in more stringent guidelines. When a new regulation is issued, investors receive corresponding update requests from each of their funds, and they must provide increasingly detailed information and keep it current with all their managers. Automation can help them collate and store their data and seamlessly transmit it to each of their funds.
When investors initiate updates, such as a change in banking info, they need to disseminate the new instructions to each fund. Automation can make this a snap to complete. Similarly, a legal entity, tax, and KYC profile for the LP that is reusable across different funds would cut friction for both the LP and GP when applying to a new fund.
What will drive the tipping point?
The day will come—a year or two from now, or sooner—when legacy onboarding methods will become too cumbersome and undesirable to afford, and nearly every fund adopts automation. Private markets are currently in the early stages of adoption, with many funds waiting to see how technology in the markets plays out. Institutional investors are typically conservative about adopting new technology, and fund managers are hesitant to impose it on their core investors.
But attitudes are shifting. It will help when fund managers see investors use and embrace new digital methods to improve workflow, such as a reusable profile that can share updates to all their GPs with one click.
They also notice how automation helps their rivals raise funds, while their own margins are hurt by operational costs. For private equity managers who seek to grow by adding multiple strategies, frictionless onboarding becomes key to winning more investment from existing investors.
Soon enough, private funds will notice competitors inviting investors to use their systems. The real turning point may come when investors begin to reset their baseline expectations to a digitally improved experience, and stop accepting manual methods. That can trigger FOMO—of losing both new investors and funding—and push the momentum to a tidal swing.
Regardless of whether a fund is an early adopter or more mainstream, a word of advice would be standardization. A standard or ‘open’ reusable and portable profile gives investors no-hassle ease to pursue higher returns by experimenting with new funds.
Automation now, or a scramble later?
You won’t be surprised that we suggest deploying automation in the near term to set up a common ‘handshake layer’ between LPs and your funds, and improve margins now. LPs will have better interactions with your firm in place before the upturn, when there will be much more intense competition from well-prepared private fund families and many more new investors to manage.
With digital workflows, updates driven by new compliance regulations will no longer feel like emergencies for managers, but rather routine actions that can be integrated and tested quickly in these workflows. This provides managers with the comfort of knowing these changes will be single-click or low-click for their LPs. The time to field-test this is now, before the rush hour begins.
An upturn means more potential LPs, ready to invest more, with a boom in opportunities for growth, but it doesn’t guarantee new investors will line up to invest with you. When they take a good user experience for granted, they won’t accept a substandard UX. Overall, fund managers should make the entire relationship as easy and navigable for LPs as possible—this year, not next.
