Meeting the challenge
28 Jun 2023
Allvue’s Robert Sims talks to Lucy Carter about the challenges general partners are facing in the current environment and what they need to be doing to keep up with changing times
Image: Allvue
In 2019, Vista Equity Partners acquired back-office and reporting services provider AltaReturn and decided to merge it with data firm Black Mountain Systems. Combining the strength of the two companies created Allvue, an alternative investment solutions provider.
Robert Sims joined the firm in January 2021 as a senior solutions engineer for the firm’s private equity division, and was later appointed head of solutions engineering for Europe.
Current affairs
Considering the current environment of market volatility and increased interest rates, “you would think that smaller managers would be hit less,” Sims says. “They’re typically relying less on banks to fund deals than the larger, later stage buyout funds and larger general partners (GPs).”
In reality, however, no market participant is exempt from the macro environment — they’re just feeling the impact in different ways. “It’s costing GPs more to keep the pre-revenue or non-profitable firms that smaller venture capital (VC) and private equity (PE) firms are investing into afloat,” Sims explains.
“That, combined with the fact that valuations on acquisitions made in the last few years are probably down on where they were when they were acquired, means that it’s a pretty tough environment for smaller managers.”
Smaller GPs made a large volume of high valuation investments in recent years. Now, due to increased interest rates, there’s very little deal activity happening and “managers have to instead focus on creating value in the investments they’ve already made,” Sims says.
While larger GPs can afford to be more aggressive in their approach, as they have access to private debt funding and accumulated funds, “smaller GPs are really just trying to keep the lights on and add value within the investment they’ve made,” he continues.
In order to be successful in the current environment, “the key is adding value from the inside out and playing a longer-term game,” Sims affirms, suggesting that managers “batten down the hatches rather than looking for short-term exits.”
There has been speculation that fundraising for alternative funds is on the rise, with research suggesting that alternative managers are confident they will see increased capital raised over the next year.
Sims is more cautious in his predictions: “I don’t think we’re going to be returning to the heady heights that we saw a couple of years ago any time soon — 2021 was the boom. But I do think things are going to pick up towards the later half of this year and into 2024.”
Over the last few quarters, valuations of portfolio companies that have taken a hit have begun to even out. “It doesn’t look like valuations are decreasing rapidly, as they have been,” Sims reports. “That means that the internal rates of return (IRRs) are the one thing being hit. However, IRRs are going to start dwindling over time if no action is taken,” he warns.
If GPs don’t react quickly, their hands may be forced; “they’ll have to start exiting on investments or those IRRs are just going to get worse. They have to accept the new market conditions.”
Action is the only way forward, Sims affirms: “new deals coming to the market will fuel fundraising as GPs see lower prices.”
Investor engagement
Increases in investor engagement are clear across the industry, with firms scrambling to meet the increasing demands of their clients. Whether it’s having a say on ESG policies or being given a voice through pass-through voting, investors want their voices heard.
“I think limited partners (LPs) and investors are becoming a lot more demanding because they see a higher risk associated with their commitment to a GP,” Sims muses.
One way to quell investor fears is with real-time data provisions, he offers.
If a GP is using a fund administrator and submits an investor’s request for information, “that fund administrator might have a 90-day reporting deadline. That means it takes three to four months before an LP actually receives performance data for the fund.”
In an increasingly fast-moving world, “LPs don’t want to have to wait until the end of the quarter to see reports,” Sims states.
“They’re expecting a dynamic investor portal, where they can look at their exposures to different industries and geographies.”
This type of provision is becoming the “gold standard” for GPs, he affirms. As LPs are often invested in several GPs, once one offers access to this data, it will become an accepted expectation.
By improving investor data access, GPs will be able to improve the trust their LPs have in them, Sims adds.
“Providing real-time access to the performance of the fund and the portfolio company, and being honest about when assets are underperforming as well as over performing, is important,” he says. “In the market we’re in, not everything is going to be rosy. You can’t sugarcoat the information you’re giving.”
Giving investors the capability to serve themselves, to see performance data directly without having to go through a GP and a fund administrator, is the way forward. GPs need to “put more power in the LPs hands,” Sims urges, by providing “dynamic reporting, portal software and a world-class technology stack.”
Inside out
As investors send out greater numbers of ad-hoc requests, “the GPs don’t have the internal staff to meet these demands.” This is usually where a fund administrator comes in — but they, too, are struggling with industry-wide talent acquisition and retention problems.
While the rest of the industry is keen to embrace outsourcing as they try to keep up with the rapidly evolving regulatory and technology landscape, Sims notes “an increased trend for GPs to bring back- and middle-office operations in-house.”
A direct response to the increased demands of investors, “GPs need to own their data in order to promptly and effectively respond to requests.”
This in-sourcing generally takes one of two forms. Either fund administrators are entirely removed from the equation and GPs complete all operations themselves, or they maintain their current systems but operate “shadow books” in house. This involves “essentially outsourcing everything, but doing it in parallel in house so that if an investor calls up with a question, they can have that data at their fingertips.”
Shadow accounting is a big trend in Europe, Sims reports, while in the US the trend is “co-sourcing”. In this structure, a GP owns their data in house and a fund administrator logs onto their platform to perform the relevant services. This best-of-both-worlds approach lets GPs conduct reports faster and allows greater outsourcing flexibility — if a fund administrator’s performance isn’t up to scratch, the GP can switch providers with ease.
Technology focus
On where emerging managers should be focusing their technology and infrastructure investments, “we always recommend starting with the back office as phase one of an implementation,” Sims says. “Getting accounting and reporting in place is the priority.”
Of particular importance is ensuring that the technology being used is fit for purpose, and specifically designed for the market. “GPs with nothing in place are often using Excel, or a generic accounting platform. These systems are built for companies rather than funds, so have no way to natively allocate down to investors.”
Without the right tools, managers will be left with poor reporting and no investor-specific performance data. “Reports that don’t look like you’d expect from a fund, with no investor-level information or Institutional Limited Partners Association reporting templates — that’s a red flag,” Sims warns.
In short, “getting accounting and reporting in place is the priority, then you can add on additional modules such as investor portals or portfolio monitoring. It’s all well and good having shiny reporting tools, but an accounting system is always going to be the backbone of a GP’s operating model. It’s what will allow firms to quickly scale to capitalise on market opportunities when they present themselves.”
It’s no secret that many areas of the industry need to refresh the technology they’re using for day-to-day operations, and GPs are no exception. “If capital call notices are being sent out by email, there’s a good chance that the numbers in that document have just been plugged in by a person,” Sims says. “This is dangerous when you’re talking about capital calls and distributions.” He recounts a horror-story fat-finger error resulting from manual input of capital call data, cautioning that “one zero too few or too many can cost you an anchor LP, and can ultimately cost you your business.”
Allvue
With all the stumbling blocks that lie in wait for GPs, “the market is pretty crowded with private equity and private credit solutions — mostly point solutions that cover one specific aspect of the lifecycle,” Sims observes. So what differentiates Allvue from the competition?
“We’re a lot more focused than some of our competitors. We’re not part of a huge conglomerate, we focus exclusively on the private markets,” Sims says. “We’ve built a specialist platform for the whole lifecycle, covering everything from fundraising all the way through to fund accounting and portfolio monitoring.” By providing a one-stop-shop, Allvue removes the need for small and emerging managers to juggle several vendor relationships all at once.
The company’s technology also helps it stand out from the crowd: “We partnered with Microsoft, which builds the underlying modules, while we only focus on the private market-specific functionality.” This makes its products far more accessible, as the majority of users will be familiar with at least some aspects of Microsoft’s suite. “Employees can slot in without much training,” Sims explains, which eases the ever-present talent acquisition burden.
Allvue recently launched open APIs, whereby clients can select individual aspects of its solutions for their workflow while using additional vendors for other services. Just this year, the company has made its portal service available as an independent product. “Typically we offer the full front-to-back suite to emerging managers, but with this we’re targeting even smaller fund managers that only need the portal aspect of our solution,” Sims says.
Despite being on the scene for just under four years, Allvue has certainly made a splash. The firm is just at the start of its journey, and as market volatility increases, demands for investor engagement continue to rise and technology continues to develop, it certainly has not yet reached its peak.
Robert Sims joined the firm in January 2021 as a senior solutions engineer for the firm’s private equity division, and was later appointed head of solutions engineering for Europe.
Current affairs
Considering the current environment of market volatility and increased interest rates, “you would think that smaller managers would be hit less,” Sims says. “They’re typically relying less on banks to fund deals than the larger, later stage buyout funds and larger general partners (GPs).”
In reality, however, no market participant is exempt from the macro environment — they’re just feeling the impact in different ways. “It’s costing GPs more to keep the pre-revenue or non-profitable firms that smaller venture capital (VC) and private equity (PE) firms are investing into afloat,” Sims explains.
“That, combined with the fact that valuations on acquisitions made in the last few years are probably down on where they were when they were acquired, means that it’s a pretty tough environment for smaller managers.”
Smaller GPs made a large volume of high valuation investments in recent years. Now, due to increased interest rates, there’s very little deal activity happening and “managers have to instead focus on creating value in the investments they’ve already made,” Sims says.
While larger GPs can afford to be more aggressive in their approach, as they have access to private debt funding and accumulated funds, “smaller GPs are really just trying to keep the lights on and add value within the investment they’ve made,” he continues.
In order to be successful in the current environment, “the key is adding value from the inside out and playing a longer-term game,” Sims affirms, suggesting that managers “batten down the hatches rather than looking for short-term exits.”
There has been speculation that fundraising for alternative funds is on the rise, with research suggesting that alternative managers are confident they will see increased capital raised over the next year.
Sims is more cautious in his predictions: “I don’t think we’re going to be returning to the heady heights that we saw a couple of years ago any time soon — 2021 was the boom. But I do think things are going to pick up towards the later half of this year and into 2024.”
Over the last few quarters, valuations of portfolio companies that have taken a hit have begun to even out. “It doesn’t look like valuations are decreasing rapidly, as they have been,” Sims reports. “That means that the internal rates of return (IRRs) are the one thing being hit. However, IRRs are going to start dwindling over time if no action is taken,” he warns.
If GPs don’t react quickly, their hands may be forced; “they’ll have to start exiting on investments or those IRRs are just going to get worse. They have to accept the new market conditions.”
Action is the only way forward, Sims affirms: “new deals coming to the market will fuel fundraising as GPs see lower prices.”
Investor engagement
Increases in investor engagement are clear across the industry, with firms scrambling to meet the increasing demands of their clients. Whether it’s having a say on ESG policies or being given a voice through pass-through voting, investors want their voices heard.
“I think limited partners (LPs) and investors are becoming a lot more demanding because they see a higher risk associated with their commitment to a GP,” Sims muses.
One way to quell investor fears is with real-time data provisions, he offers.
If a GP is using a fund administrator and submits an investor’s request for information, “that fund administrator might have a 90-day reporting deadline. That means it takes three to four months before an LP actually receives performance data for the fund.”
In an increasingly fast-moving world, “LPs don’t want to have to wait until the end of the quarter to see reports,” Sims states.
“They’re expecting a dynamic investor portal, where they can look at their exposures to different industries and geographies.”
This type of provision is becoming the “gold standard” for GPs, he affirms. As LPs are often invested in several GPs, once one offers access to this data, it will become an accepted expectation.
By improving investor data access, GPs will be able to improve the trust their LPs have in them, Sims adds.
“Providing real-time access to the performance of the fund and the portfolio company, and being honest about when assets are underperforming as well as over performing, is important,” he says. “In the market we’re in, not everything is going to be rosy. You can’t sugarcoat the information you’re giving.”
Giving investors the capability to serve themselves, to see performance data directly without having to go through a GP and a fund administrator, is the way forward. GPs need to “put more power in the LPs hands,” Sims urges, by providing “dynamic reporting, portal software and a world-class technology stack.”
Inside out
As investors send out greater numbers of ad-hoc requests, “the GPs don’t have the internal staff to meet these demands.” This is usually where a fund administrator comes in — but they, too, are struggling with industry-wide talent acquisition and retention problems.
While the rest of the industry is keen to embrace outsourcing as they try to keep up with the rapidly evolving regulatory and technology landscape, Sims notes “an increased trend for GPs to bring back- and middle-office operations in-house.”
A direct response to the increased demands of investors, “GPs need to own their data in order to promptly and effectively respond to requests.”
This in-sourcing generally takes one of two forms. Either fund administrators are entirely removed from the equation and GPs complete all operations themselves, or they maintain their current systems but operate “shadow books” in house. This involves “essentially outsourcing everything, but doing it in parallel in house so that if an investor calls up with a question, they can have that data at their fingertips.”
Shadow accounting is a big trend in Europe, Sims reports, while in the US the trend is “co-sourcing”. In this structure, a GP owns their data in house and a fund administrator logs onto their platform to perform the relevant services. This best-of-both-worlds approach lets GPs conduct reports faster and allows greater outsourcing flexibility — if a fund administrator’s performance isn’t up to scratch, the GP can switch providers with ease.
Technology focus
On where emerging managers should be focusing their technology and infrastructure investments, “we always recommend starting with the back office as phase one of an implementation,” Sims says. “Getting accounting and reporting in place is the priority.”
Of particular importance is ensuring that the technology being used is fit for purpose, and specifically designed for the market. “GPs with nothing in place are often using Excel, or a generic accounting platform. These systems are built for companies rather than funds, so have no way to natively allocate down to investors.”
Without the right tools, managers will be left with poor reporting and no investor-specific performance data. “Reports that don’t look like you’d expect from a fund, with no investor-level information or Institutional Limited Partners Association reporting templates — that’s a red flag,” Sims warns.
In short, “getting accounting and reporting in place is the priority, then you can add on additional modules such as investor portals or portfolio monitoring. It’s all well and good having shiny reporting tools, but an accounting system is always going to be the backbone of a GP’s operating model. It’s what will allow firms to quickly scale to capitalise on market opportunities when they present themselves.”
It’s no secret that many areas of the industry need to refresh the technology they’re using for day-to-day operations, and GPs are no exception. “If capital call notices are being sent out by email, there’s a good chance that the numbers in that document have just been plugged in by a person,” Sims says. “This is dangerous when you’re talking about capital calls and distributions.” He recounts a horror-story fat-finger error resulting from manual input of capital call data, cautioning that “one zero too few or too many can cost you an anchor LP, and can ultimately cost you your business.”
Allvue
With all the stumbling blocks that lie in wait for GPs, “the market is pretty crowded with private equity and private credit solutions — mostly point solutions that cover one specific aspect of the lifecycle,” Sims observes. So what differentiates Allvue from the competition?
“We’re a lot more focused than some of our competitors. We’re not part of a huge conglomerate, we focus exclusively on the private markets,” Sims says. “We’ve built a specialist platform for the whole lifecycle, covering everything from fundraising all the way through to fund accounting and portfolio monitoring.” By providing a one-stop-shop, Allvue removes the need for small and emerging managers to juggle several vendor relationships all at once.
The company’s technology also helps it stand out from the crowd: “We partnered with Microsoft, which builds the underlying modules, while we only focus on the private market-specific functionality.” This makes its products far more accessible, as the majority of users will be familiar with at least some aspects of Microsoft’s suite. “Employees can slot in without much training,” Sims explains, which eases the ever-present talent acquisition burden.
Allvue recently launched open APIs, whereby clients can select individual aspects of its solutions for their workflow while using additional vendors for other services. Just this year, the company has made its portal service available as an independent product. “Typically we offer the full front-to-back suite to emerging managers, but with this we’re targeting even smaller fund managers that only need the portal aspect of our solution,” Sims says.
Despite being on the scene for just under four years, Allvue has certainly made a splash. The firm is just at the start of its journey, and as market volatility increases, demands for investor engagement continue to rise and technology continues to develop, it certainly has not yet reached its peak.
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