Investment advisers that include Aksia, StepStone Group, Cliffwater and Hamilton Lane ramped up their investments in technology following the financial crisis of 2008 and 2009 to better analyse the thousands of data points they regularly received from general partners. Advisers and their clients have turned to these dashboards as they seek to understand the ways in which the pandemic and economic volatility it caused could affect their portfolios.
“Part of the reason for having those systems in place was to be able to respond effectively to clients during stressful periods by keeping the spigot of data open and by having tools to quantitatively assess portfolios,” said Bryan Jenkins, head of Hamilton Lane’s private markets analytics team.
In 2016, the team created Cobalt, a proprietary portfolio analytics platform for its clients, by partnering with private market software company Bison, now known as Cobalt Software. The firm also uses iLevel Solutions, a reporting platform originally incubated within Blackstone and spun out in 2010, which enables real-time tracking of portfolio information down to a company-level detail.
To help build these dashboards, investment advisers grappled with information gathered from general partners that didn’t follow any particular template.
“We had to normalise all the inputs we were gathering from every GP for each of our buyout portfolios to make sure that it was sort of comparable data to come to certain conclusions,” said Jenkins.
StepStone’s dashboard tracked changes in public markets by industry and subsector and projected those changes on the holdings in an investor’s private equity portfolio. Further, it extrapolated from historical analyses to assess how much the private market assets would be impacted by movements in the public markets, allowing investors to set the percentage of that impact for each general partner.
“You really needed to peel back layers of the onion on a specific business to understand the impact,” said Tom Keck, partner, head of portfolio management at StepStone.
The data dashboard also allowed investors to split sectors further into different impact categories, depending on the magnitude of the change in the public markets, and allowed them to evaluate individual portfolio companies based on the capital available in the fund.
“If you had a high-risk company in a fully invested fund, it was a different risk profile than if you had a high-risk company in a fund that had capital to defend it,” Keck said.
The virus-induced volatility has prompted StepStone to refine its platform even further by creating more sensitive return and pacing scenarios for different private market strategies, developing projections of expected loss ratios on debt portfolios and other volatility measurements for different public-market indicators.
“That will give us a much tighter confidence interval around expected valuations, so we can provide an estimate of a portfolio’s overall valuation at a measurement date and LPs don’t have to wait 90 days to see how their private market portfolio performed relative to their public market portfolio,” Keck said.
Shawn Wooden, Connecticut State Treasurer who holds sole discretion over the investments of the Connecticut Retirement Plans and Trust Funds, said investment adviser StepStone’s dashboard “was a useful tool to get a high-level assessment of the potential valuation impacts during a period of extreme volatility such as the one we experienced in mid- to late March.”
All these enhancements to investment advisers’ data dashboards, however, haven’t entirely replaced more traditional intelligence-gathering approaches, including direct conversations with general partners.
Cliffwater’s research notes that reflected what was happening with the general partners’ portfolio companies proved particularly useful during the pandemic, according to senior managing director Gabrielle Zadra.
“We got really positive feedback from clients because the notes were easy to access,” said Zadra. “Clients just don’t have the capacity to reach that many GPs and break down the information for each company in their portfolio.”
Source: Wall Street Journal
