Private Ties: Technology Rises in Private Equity

Following the financial services industry’s collective flogging four years ago, the 2012 US elections saw a more specific target this time around: private equity—and presidential candidate Mitt Romney’s firm, Bain Capital, in particular. Whether that criticism was deserved is a matter of judgment—surely not all venture capitalism is “vulture” capitalism, and the private markets offer a number of advantages public trading does not—but the takeaway was clear: Private equity is naturally secretive and, therefore, is not properly understood.

The irony of all this is its timing. Private equity, perhaps more than at any time in its three-decade history, is changing, and many say for the better. Deals are becoming more complex; limited partnerships (LPs)—e.g., institutional investors, sovereign wealth funds, even endowments—are growing more diverse; and because of macro and regional instability, the secondaries market, where firms sell existing stakes in portfolio companies, is expanding.

Those trends portend a greater affinity for information and communication between LPs and their general partners (GPs) like Carlyle Group and Kohlberg Kravis Roberts (KKR). Three recent projects suggest it means better technology.

‘Adult Rules’
Erik Hirsch, chief investment officer at private equity manager and adviser Hamilton Lane, says traditional views of the space—internally, as well as externally—have to do with process as much as mystique.

“Historically, this has been an asset class so long-term in nature that there was no pressure to have efficient information-sharing like you would have in a public market where decisions are made in seconds—whereas it would be months and years in private equity. That’s changing—not so far as day trading, obviously, but as standards change, we struggle to determine why we’re different. The explanation has been that in private equity it’s just ‘different.’ No benchmarks, or seamless data transition. It’s just ‘different.’ The asset class is too big and too important for that excuse now.”

“No one invests in private equity expecting liquidity—although it’s nice when the terms are right—but everyone always wants to know what their investment choices are across regions, specialities and structures.” —Antoine Drean, Palico

Bala Cynwyd, Pa.-based Hamilton Lane, with $167 billion assets under management or supervision, recently inked a strategic partnership with iLevel, a portfolio management system provider originally spun off from Blackstone Goup.

The objective, Hirsch says, is to build the platform to “bridge” LPs and GPs, aggregating and disseminating portfolio company information, such as capital call notices, that iLevel already collects.

“Software packages now tend to skew either toward one or the other; there is no notion of participation and passing information in an efficient way. To connect the pipe between LPs and GPs—this will be a game changer,” Hirsch says. “The limited partner world has typically seen reporting only at a fund level, where you’re invested in 10 fund positions, and what is in your reporting system is top-line information: how much is committed, invested, distributed, and what is the multiple and internal rate of return. The system is not designed to look into the portfolio company level through the funds, but as private equity matures and becomes more important in LPs’ overall portfolios, people will want access to more granular information more frequently, beyond just fundraising periods.”

Hirsch says that maturation is also overdue. “There’s a reason why we’re 30 years into the asset class’s development, but still talking about this. For some number of parties, a lack of benchmarking and inefficient reporting is okay, either because it’s how they grew up, or it’s even benefited their franchise. If you’re the consistent third or fourth quartile performer, you’re fine with that because it makes it easier to manipulate the system to your advantage. This is where the asset class just needs to grow up, and play under adult rules,” he says.