A survey of LPs reveals trends in investments to alternatives and dissatisfaction with transparency.
It’s no surprise that alternative investments remain a key component in investors’ portfolios, and the survey results found that many LPs have more than a 30 percent allocation to alternatives. To add to that, two-thirds of LPs reported that they plan to increase their allocations to alternatives by between one percent to 10 percent, which would add an extra $335 billion, bringing net inflows to $703 billion.
While it’s one thing for LPs to plan to increase investments, it’s another task completely to select the right manager to put all of that capital to work. Unfortunately, some LPs choose incorrectly, and end up dissatisfied not only with the performance of their investments, but with the communication with GPs about said investments.
Issues with GPs and transparency
One of issues many LPs are facing is their level of satisfaction with transparency on investment performance. In fact, the global survey found that 54 percent of respondents were only “somewhat satisfied” with the visibility they are currently receiving from fund managers. Only one in five LPs reported being “very satisfied,” indicating there’s some work to be done to close the discrepancy between LPs’ expectations and the reality of GPs’ communications methods.
GPs who ignore this dissatisfaction can find themselves at the losing end of attracting investors to their funds, and those who make transparency more of a priority could gain a competitive edge. More recently, there has been a bigger push towards the standardization of reporting fund performance, but that doesn’t appear to be what LPs actually want. In fact, the survey found that only 30 percent of LPs were requesting to receive Institutional Limited Partners Association (ILPA) templates. This shows that LPs are not interested in a blanketed approach to communication, and GPs need to take a more personalized stance. They should ask LPs:
By setting the parameters at the beginning of relationship, GPs can help increase the level of satisfaction from LPs, retain their existing LPs, and attract new investors to their funds.
Walking a fine line: how much is too much
While transparency is of high importance, GPs also need to walk a fine line between communicating important information with investors and sharing too much. While it’s good to provide LPs with regular updates on portfolios, GPs don’t need to provide an update on a daily or weekly basis to achieve transparency.
The survey also found that, in general, 86 percent of LPs are either “somewhat satisfied” or “very satisfied” with ad hoc reporting requests, which may indicate that although they are not completely satisfied with GPs willingness to be forthcoming in reporting, they feel their requests are being fulfilled. It may also indicate that GPs are making improvements to their middle-office capabilities and may even be appointing fund administrators. This comes as no surprise, as GPs are also required to adhere to numerous global regulations, including Form-PF, CPO-PGR, and others.
Compliance woes: GDPR and other cyber risks
While GPs are working towards meeting transparency needs for LPs and regulators, there have also been other significant regulatory developments as it pertains to safeguarding client data. The European Union’s General Data Protection Regulation (GDPR) is set to go into effect in May 2018 and aims to protect personally identifiable information. This new regulation will impact any global fund manager who has European investors, so being prepared is paramount. In fact, penalties for non-compliance can be so steep that it can close the doors of managers who do not take data protection seriously.
Surprisingly, 79 percent of respondents were not concerned about GDPR, so the gravity of the compliance mandate may not have hit this group yet. There may be an overall lack of awareness, as investors often treat compliance as “check-the-box” exercise. Moving forward, it will be critical for GPs to clearly communicate and provide options for keeping client information safe, even if it’s not a top concern for LPs – yet.
In the end, successful investing requires clear communication
Having good communication lines is the most important relationship builder for LPs and GPs. Investors prefer to maintain an open dialogue, even when the news isn’t positive. GPs need to be sure LPs are made aware of what’s happening, especially as alternative investing will remain key in second half of the year.
Meghan McAlpine is director of strategy and product marketing at Intralinks.
Intralinks and Global Fund Media conducted a limited partner (LP) survey to examine how investors view the general partners (GPs) they currently allocate investments to. Approximately 140 LPs were surveyed, and the study unveiled what LPs want from fund managers and what their future investments plans are. The research revealed that while allocations to alternatives will be on the rise for the second half of 2017, transparency on performance is a near-term concern, and GPs need to do better when communicating with their fund investors.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.