15 November 2021 - The pandemic has been a catalyst for innovation across the alternative investment industry as it responded to the challenges caused by COVID-19, and one area in particular which had to adapt is investor relations.
The challenges caused by remote work and changing investor requirements become a focal point last year, and manager-investor relations are now evolving in a way that we have not seen since the aftermath of the 2008 global financial crisis.
These are not short-term changes. While the pandemic is being tackled globally, the trends taking shape in investor relations – while exacerbated by the events of 2020 – are here to stay for the alternative investment industry.
Below we identify four major trends emerging, and how asset servicers can help investment managers make the most of them.
ESG a focus as investor-manager relationship changes
Investors continued to demand higher levels of transparency from managers throughout 2020 on their environmental, social and governance (ESG) principles, processes and procedures. The increased importance of ESG factors for the IR function has been steadily gathering pace since 2019.
The result is that ESG considerations are now firmly entrenched in the IR process, to the extent that managers’ operational performance on ESG has become as important as their investment performance to some allocators.
As the pandemic progressed, we saw a notable shift in focus from environmental factors to social responsibility and governance. Allocators wanted to know how companies were handling the pandemic in terms of employee welfare and equality.
Allocators are increasingly interested in the scope of the ESG policies a manager has in place for their own firm and how they are being implemented and enforced. Many now demand that managers provide regular metrics on the performance of the activities outlined in their policies, with the focus not just on managers’ investments, but also their day-to-day operational ESG in the workplace.
This has resulted in more importance being placed on diversity, equity and inclusion (DEI), with many due diligence questionnaires now looking to identify socially conscious investment managers who are committed to improving diversity through fair hiring policies.
To help with these demands, IR teams are looking to asset servicers – and the significant amounts of data they provide – to help them with their ESG reporting and transparency requirements. In turn, asset servicers have developed bespoke ESG solutions for managers, combining proprietary and third-party data to create sustainability reporting metrics that transparently showcase a manager’s ESG strengths.
Digital operations now a must-have
Covid-19 has placed greater emphasis on the importance of a manager’s technology and how it enhances their operational efficiency. Without the right technology solutions, managers are stuck having to print, sign, scan and email everything from subscription forms to redemption requests, and all while working from home.
This comes as the pandemic has highlighted how alternatives can diversify portfolios and protect against market downturns. Understandably, managers are continuing to explore the ability to attract subscriptions with minimal impact to investors – yet it is extremely difficult to raise assets in the current environment without a fully digital user experience.
We believe that secure online solutions will be paramount to successful capital raising for the foreseeable future.
Capital raising transformed by digital interaction
This is true across the alternative investment industry, but it is particularly prevalent in the private equity industry where Preqin predicts the sector will receive the largest inflows within alternatives – doubling assets to $9.1 trillion globally by 2025. This places greater pressure on individual GPs to attract a larger share of these inflows through the use of modernized workflows.
Ideally, managers will be able to gauge investor sentiment with live usage reporting on which potential investors are engaging with fund offering materials, and where investors stand in the multi-phased subscription process. Whether or not a manager has digitized their IR workflows will be a key deciding factor in separating those who sink from those who swim. Those mangers who fail to advance beyond emails and paper postage will struggle to differentiate themselves in an era where institutional due diligence is becoming more stringent.
Investor communications increasingly moving to portals
With technology playing a larger role in asset servicing, operational vulnerabilities are changing, driving asset servicers toward a more holistic understanding of the evolving risks. Cybersecurity concerns, for example, are now top of mind and will be into the foreseeable future. This has spurred significant attention towards the secure online transmission of investor documents using portals, which simplify and automate the management of prospective investors and placement of initial investments using electronic document execution.
These secure portals provide alternatives managers with a virtual data room that is simple to set up and makes information readily available to interested parties during fund launches, closings, side letter document management and ongoing reporting. Functionality such as automatic e-mail notifications, user activity metrics, document security and watermarking help managers to focus more on a meaningful investor experience and less on lower value administrative tasks.
By Emer McGuckin, Managing Director, Head of Investor Relations, Citco (Canada) Inc.