Clement Aglietta, CEO and co-founder of Edda, explains the two issues that prevent us from providing more transparency to LPs and how to fix them.
The current volatile macroeconomic conditions, fuelled by Russia’s war with Ukraine and rising interest rates, have left many investors reevaluating their allocation and risk exposure. Fundraising is expected to take longer and adjust their target sizes to reflect lower LP appetite. A number of institutional investors, including pension funds and insurance companies, are expected to be reducing their asset allocation to private markets. This creates a power shift in the industry, highlighting the need for fund managers to cater to LP demand.
Performance and reputation will be key considerations for LPs this year, as they are seeking fund managers with proven track records to defy gloomy market conditions. Large funds that were able to raise record amounts of money in recent years but have now reported poor performance, like Tiger Global and Softbank, will find it more difficult to raise funds of the same size in 2023.
Whilst performance will become paramount in the LP decision-making process, there is another factor that will play a key role in retaining and building trust with investors in the current climate: transparency.
The private markets have been struggling to shake off their image of opaqueness, mainly due to the lack of transparency. The reason is that there are no standard metrics to measure financial returns or impact in the private markets at the moment. Every investor sets their own KPIs, which makes it difficult to track and compare the impact of different funds. This prevents us from establishing a unified framework to evaluate fund performance, which creates confusion on both the GP and LP side. We need to define metrics that can be used to evaluate impact throughout the whole lifecycle of the process, enabling each party to report in a timely and accurate way to their respective stakeholders.
While we need metrics to measure financial returns and impact, I am particularly passionate about the latter at a time when ESG is front of mind for many investors. There is a lot of dry powder in the private markets, but with LPs being more selective of their capital allocation, funds can set themselves apart with excellent impact KPIs.
The race to net zero between countries and companies led to more LP scrutiny when it comes to sustainability. We have identified a trend to include ESG factors and KPIs in fundraising and portfolio management. This is not just true for impact funds, which have grown exponentially in recent years, but also generalist funds. ESG considerations are of growing importance to LPs, and we are seeing them implemented in all processes, from due diligence to reporting.
The problem at the moment is that there is no single place to aggregate all data. Investors have to jump between different platforms and applications to gather relevant data, which is a tedious and time-consuming process. If we want to create more transparency between LPs and fund managers, we need to enable transparent, ongoing communication between the two. That means equipping them with tools to view and share information on their investments, from performance to impact, in real-time.
Building strong relationships with LPs is crucial in times of economic uncertainty, and having a set standard for both financial returns and impact KPIs within funds is something I would like to see more of in the future.
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