Institutional assets tend to have sophisticated tools in place to manage the liquid assets in their portfolios but these don’t transfer well to the unique needs of private market investments because they provide little to no flexibility in terms of addressing the specific challenges that come with illiquid assets.

In this article, we are going to explore the unique aspects of this opaque asset class and show how an analytical portfolio management solution can support investors in making decisions that are backed by real data and models.

Navigating opaque markets

Private markets are notoriously challenging to navigate as they tend to be opaque and less transparent than public markets, which exacerbates the need for robust performance measurement and comparison. 

As such, investors in private markets are often short of key information such as:

• What is the true value of the portfolio company of a fund?

• What cash flows can be expected in the next period?

• To what extent will the fund manager call the committed capital?

Analytical portfolio management in private markets has matured over the years as more data has become available and the track record time series has grown. These types of solutions soften the impact of the inherent lack of data when it comes to private market investments, and maximise the value derived from whatever data is available, providing insights to the investment team in an easy-to-consume fashion. This allows two key capabilities to be provided:

• The investment team can keep track of the portfolio performance and
• Document the expected outlook on the future cash flows of the private markets portfolio.

The methods that are enabled by such technology far exceed the capabilities of classical portfolio management tools and Microsoft Excel because:

• data can be managed across multiple dimensions and contexts;
• analytical models are embedded; and
• collaboration during the investment process is supported.

Collaboration, talent, and leadership

Building up analytical capabilities within your organisation is all about leveraging a range of different skills in the investment process. It requires a real team effort to share different perspectives but to agree on a common view and set of expectations for a private market portfolio. This is especially true during the deployment phase when the investment proposal itself is the key deliverable. Being able to communicate effectively to many different stakeholders about the reasoning for various decisions and why other options have been ruled out is the foundation of shared investment decisions.

Analytical Portfolio Management tools support this collaboration between the investment and reporting teams, the CIO, and the principal on various components including, but not limited to:

• Performance reporting;
• Cash flow forecasting;
• Investment pacing; and
• Scenario development and tracking.

Let’s look at how each stakeholder type can benefit from this sort of technology:

The investment team

The investment team drives the process of managing the private market portfolio. They are the power users of any analytical LP portfolio management tool. Having access to a wide set of best practice reports allows the team to better understand the dynamics in the portfolio and helps them better perform their main duties which include:

• Assessing performance;
• Proposing pacing decisions to optimise the portfolio; and
• Preparing for new investment decisions.

With analytical portfolio management in place, they can make better decisions with a high volume of loosely structured documentation and invest less time in the post-investment process. Their focus shifts to higher value functions, like investment research or client engagement.

Skilled LP Portfolio Managers are rare and high in demand. An up-and-running analytical process and tooling can be a decisive factor for such talent to join the organisation because the LP Portfolio Manager can focus on their core competencies, preparing the next investment decisions rather than having to build brand new spreadsheets.

The appeal of advanced analytical capabilities will attract fresh talent as they can develop their own competencies. An advanced organisation creates attractive environments for private markets professionals by giving them the tools to do their job and automate as much as possible.

The reporting team

The preparation of quarterly reports requires significant effort from the reporting team. Collecting the quarterly capital statements from the GPs and mapping these proprietary formats to a consistent data structure is needed to ensure comparability and consistent reporting.

The automated data management, enrichment, and advanced reporting capabilities that come with analytical portfolio management solutions can reduce the time it takes to produce a quarterly report from weeks to a few days. This makes a world of difference in terms of effort – allowing the team to focus their time and attention on the higher-value interpretation of the results being reported.

The Chief Investment Officer (CIO)

The responsibility to develop the investment strategy, implement and optimise the portfolio, and report the results often sits with the CIO. This requires a broad set of skills and deep knowledge that can be applied to real-world data. Modern CIOs can’t merely rely on their experience with traditional liquid markets but also have to demonstrate expertise in illiquid markets. As such, all CIOs can benefit from an analytical LP portfolio management solution to manage the implementation of a satellite investment strategy.

These tools provide tailor-made analysis and reports for the adjustment, implementation, and communication of strategic asset allocation.

The principal / investors The principal/investor deserves easy-to-access, accurate, and sophisticated reporting. Ideally, the investors should be able to use self-service functionality to procure additional information if they want to understand the historic and future portfolio performance in more detail. The reports can be tailor-made to match the needs and are based on real-time data like daily cash flows and pro-forma NAVs.

Use cases that require increased transparency in private markets

To better understand how important transparency is in private markets and how these software solutions can help enable that, let’s look at two specific use cases that require transparency in order to function effectively.

Performance reporting

For investors with diverse private equity holdings, aggregating cash flows across multiple funds and strategies is essential. Analytical portfolio management can consolidate these individual fund-level information into a comprehensive portfolio-level report.

Analytical portfolio management provides a unified view of the performance of private markets investments. As the data on these sorts of investments can be confusing, many fund managers are not using key standards like the ILPA’s Quarterly Reporting Standards (QRS) – meaning that fund managers take 2 or more months to submit the quarterly reports. As a result, this requires a dynamic view of the portfolio to incorporate the latest data in the actual reporting.

Basic LP portfolio management focuses on the fund-level data, aggregating the KPI (like NAV, TVPI, DPI, MoiC, etc.) and cash flows. This is very useful in aggregating a complete investment reporting, across all asset classes.

However, analytical LP portfolio management provides consistent reporting across all private market instruments (primaries, secondaries, co-investments/asset-level) and adds multiple dimensions:

• Level dimensions: reporting on portfolio, fund, and asset level;
• Allocation dimensions: reporting on asset classes/instruments, vintages, geographies, and industries; and
• Performance dimensions: reporting on valuations, cash flows, benchmarks, and performance attribution.

Truly multidimensional data structures serve as the foundation of analytical portfolio management, as can be illustrated in the diagram below:

All levels are directly related. For example, cash flow data from funds is aggregated on a portfolio level. The fund level allows for a drill down to asset-level data. The asset-level data of direct investments, with no link to a fund, are part of the portfolio-level reporting.

Visualisation of the performance has significant potential for enhancing the understanding of the stakeholders and it simplifies complex data into understandable charts and dashboards. Users can grasp a quick understanding of the overall composition of the portfolio, as well as its performance and risk characteristics.

Attribution analysis

Attribution analysis breaks down portfolio performance into its various components which can include exchange rate effects, multiple extensions, and performance improvement at asset level. This analysis helps the investment team understand the drivers of their returns and make adjustments accordingly.

Benchmarking

Benchmarking is a powerful tool for portfolio managers. It compares the performance of their portfolio to relevant market indexes or peer groups. The ambition, for many, is to outperform the chosen benchmarks. Reporting performance relative to benchmarks can include:

• Public Market Equivalents (PME);
• Vintage year comparisons;
• Custom peer group performance; and
• Cash flow-based benchmarks.

Due to the illiquid nature of private investments, benchmarking can be more challenging and subjective than in the public markets, but investors will often use a combination of these benchmarking methods to gain a more comprehensive view of their portfolio’s performance.

Valuation of funds and assets

Lacking a public market price point, the valuation of private market assets requires an entirely different approach. Market prices are available on investment rounds or at exit. And so during the investment period, the valuation is done by the fund manager based on industry best practices. These valuations can be contentious because fund managers might ‘extend and pretend’, which refers to holding on to assets or propping up capital to avoid true price discovery [1]. Funds tend to have a lag in timing so GPs will mark up less quickly during ascending markets and mark down less quickly in falling markets [2].

Some investors verify the valuation based on their valuation practices, such as the use of EBITDA or revenue multiples for industry sectors. LPs have little room to influence the investment and fully rely on the GP’s ability to deliver on their promise. However, during the regular calls with the GPs, it is helpful to be prepared with analytics on the performance of the particular funds, including the portfolio companies, to continuously assess whether the manager is delivering on the value creation plan and in accordance with their mandate. This insight is important to decide on follow-up funds of the fund manager.

Another benefit of analytical LP portfolio management is the capability to better validate secondary market opportunities. The secondary market is growing in importance as GPs have professionalised the sale of fund shares or selected portfolio companies through transactions, providing the LPs with various liquidity options. Providing asset-level reporting and analytical models, LP Analytical Portfolio Management can incorporate its own valuation models that define the perceived value of an investor.

Data management and enrichment

Portfolio Analytics is only as strong as its data foundation. To benefit from the constantly growing data volumes, a state-of-the-art data management and enrichment process is important. Sourcing valuable data and converting it into insights is the ambition of analytical portfolio management.

The data is available on different levels:

• Portfolio level: information on asset classes, strategies, and benchmarking data.
• Fund level: data such as NAV, TVPI, and cash flows.
• Asset level: information such as EBITDA and sales data from portfolio companies, as well as ESG data.

The data is often sourced from different sources with inconsistent data structures. Many fund managers report the data in a propriety format and that needs to be mapped to the data model of the analytical portfolio management solution. Data Providers offer a wide range of market information, performance data, benchmarks, etc. Organising the growing data set can be a significant manual effort, especially with regard to keeping the data up to date and ensuring data quality.

Limited partners should take advantage of the ability to load data automatically into the analytical portfolio management solution, thus avoiding costly data integration efforts.  Most data sources provide an API to load data in a structured way or data aggregation services capture the content of quarterly account statements and map it to the desired data model.

Summary

Transparency remains a vital component of success in private market investing, but it’s difficult to achieve without the appropriate technology, processes, and workflows. Making use of best-in-class analytical portfolio management tools can go a long way to ensuring better transparency and deriving the sorts of insights that make for improved decision-making.

It requires a paradigm shift, but it’s well worth focusing on – if you’re looking to embrace the future of private market investing at scale.

About Apliqo LP Portfolio Management

Apliqo LP Portfolio Management provides an easy-to-use and innovative solution that provides enhanced transparency while managing a private markets portfolio.

Optimise your decisions with a single, unified view of your entire portfolio, and achieve the following:

• Enhance your data enrichment practices to achieve better transparency across every aspect of the investment lifecycle.
• Leverage more effective communication with key stakeholders with accurate and consistent performance reporting and analysis for private market investments
• Reduce your efforts through powerful data management to increase velocity with automation.

Learn more about the solution at ais.apliqo.com and embark on the product tour to explore how the software can help you with:

• Performance reporting;
• Cash flow projections;
• Investment pacing;
• Fund manager track record analytics;
• Scenario development and tracking; and
• Asset-level analytics.