People are at the heart of any organisation, and it is important to recognise that people are not machines that are content to spend their time mimicking them. People have ambitions, cognition, flexibility, ethics and emotional intelligence that cannot be replicated by machines.
In alternative assets though, we subject many people both on the client side (GP/LP) and the provider side (vendors and service providers) to a barrage of manual tasks despite a plethora of software solutions, and increasingly qualified staff. Why then, does the industry insist that the status quo is good enough? In this article we will consider some of the challenges that today’s players in alternative assets must address, and some of the ways we are helping our own team to reach their full potential.
Increased complexity leading to lower economies of scale
In alternative assets, we live in a non-standardised world, where GPs present their data differently, and every LP has their own particular sets of requirements. Although the magnitude of difference between parties is tiny, the overall effect on workload and efficiency is cumulative. McKinsey recently quoted in a study that for managers with larger AUMs, paradoxically, the scales of efficiency one would expect not only decreases, but goes into reverse. This might well be due to larger managers with good track records having to cater for lots of different methods of investing, such as co-investments and separate accounts.
Thus, we find many well paid, highly educated investment professionals spending inordinate amounts of time in spreadsheets calculating a management fee, or manually cobbling data together to prepare a non-standard report – all this can easily happen despite huge amounts of investment in software systems. After all, a system still needs to have data entered into it either by a person or by an import process in order to be of any use.
Numerous laudable attempts have been made to force through some standardisation (ILPA, AltExchange) but most have ended up in the “too hard” basket. GPs see their own versions of servicing the needs of the LPs as part of their competitive advantage in winning commitments and keeping healthy GP-LP relationships. Most are reluctant to adopt a one-size fits all approach.
This is perfectly understandable: at the end of the day, this is a non-retail asset class where the participants are expected to have some sophistication. The only bits that are standardised therefore, are the prescribed audited financial statements, which have only a marginal utility in helping LPs decipher firstly past performance, and secondly, forecasted performance.
Unfortunately, the need to be unique, is a direct reduction in the ability to scale effectively, meaning that lots of effort is required for a GP to cater for relatively small differences between LPs.
Software trend to “best of breed”
The days of the single platform are nearly over. Increasingly, GPs and LPs are adopting “best of breed” software procurement – meaning individual packages for individual functions in the firm. The exploding number of packages being selected, means a need for people to ensure that their systems are all populated correctly – and there is a risk of transcription error when systems require manual updates, and doubly so when there needs to be a “unique identifier” for entities which are common to more than one system.
Furthermore, there is a need for someone with expert data handling skills to produce cohesive reporting across multiple platforms. If such a person does not exist within the firm, there will be a consequent rise in the workload of the regular team, in order to join together disparate data.
The viewpoint of our founder and CEO Henry Lin is that software on its own cannot answer all questions. Take portfolio monitoring for example. Plenty of excellent tools exist, but on top of the licence fee paid to the vendors, the user must also pay for the implementation fee for the software, and this is before you go to ask the portfolio company to populate a template of monthly KPI data. In essence – buying the licence to such a tool means a further burden to then get the tool populated with data. As Henry says: “we are not using AI yet”.
What sets Linnovate Partners apart is that we recognise that the solution must come in the form of a human service that is enabled, and not replaced by technology. That is why we invest over half of our revenues back into research and development, promoting cutting-edge technologies such as process automation for complex calculations like carried interest, waterfall and management fees – in fact, 80% of the regular workload for a peer firm of our size has been automated. Far from replacing our professionals, this automation has in fact freed them to handle some of the value-adding differentiators which our clients depend on, in an ever-more competitive world. So where professionals in our peer firms are spending hours and days pivoting about in spreadsheets and doing manual journal adjustments, our guys are helping our clients improve their GP-LP relationships and adapt to the changing financial environment.
Our tech enabled portfolio monitoring service allows for direct connections (where available) to the finance systems of portfolio companies, seamlessly transferring performance data to the GP, via our blockchain network “SMP Net”. Rather than imposing a template from top down, we accept that companies and individual CFOs have differing report categories, so we map those specific categories to more general ones that the GP can use for comparison. We also incentivise the use of “SMP Net” by the entrepreneurs behind the portfolio companies, as we can provide comprehensive management of capital tables that allow them not only to check pre and post dilution cap tables, but also to offer new rounds of investment to anyone who is participating in the blockchain. Every user of “SMP Net” has at their disposal an incredibly handsome and fully functioning app that is agnostic to operating system (browser, iOS native app, Android native app), and uses blockchain security for access. Our team can help to identify trends and specialisations, as well as help our clients focus on improving operational efficiencies for their investees.
The technical developments we have invested in are included in the service and are not available as a licensable product, because again, we don’t believe that software replaces people. It is only ever a tool for people to use.
Thus, we are not so much evolving the model of alternative asset servicing, but revolutionising it.