Jul 1, 2023
Raising and running a fund can be a tumultuous journey for both General Partners (GPs) and Limited Partners (LPs). Armed with a compelling investment strategy, GPs embark on a quest to raise capital from potential Limited Partners. However, this journey is no walk in the park. From Fundraising Efforts to Investor Onboarding and Regulatory Compliance as well reporting, portfolio performance and investor communications once the fund is live could be operationally heavy and involving loads of legal and admin costs.
Digitisation of funds could help both GPs and LPs with several steps along the way and make many of the operationally taxing steps a breeze to deal with. While everyone agrees that digital transformation is critical to the success of all modern enterprises, no one claims that transformation is simple. Digital transformation can be multifaceted, complex, and come with challenges. However, starting off with plug and play platforms that don’t need any integrations could help fund managers see the benefits rapidly without getting into technical rabbit holes.
We enlist various areas throughout the fund lifecycle which could vastly improve upon taking advantage of plug and pay fund management platforms:
Investor Onboarding: LPs and GPs can save weeks of time spent on manual, admin and paper heavy processes by digitising their fund operations. By running investors through online KYC/AML checks, GPs can not only stay assured of their compliance needs but make onboarding a seamless experience for their LPs as well as themselves. A report by McKinsey found that digital onboarding processes can reduce onboarding times by up to 80%.
Increased transparency: Digitised fund management platforms can provide LPs with real-time access to information about their investments, such as performance data, holdings, and fees. This can help GPs streamline communications with their investors and LPs to make informed investment decisions and monitor their investments more effectively.
Enhanced accessibility: Digital platforms allow LPs to open accounts, invest, and track their investments online. This can make it more convenient for GPs to call capital on a deal by deal basis and flatten J curves for LPs.
Reduced costs: Digital platforms can help reduce costs for LPs, as they eliminate the need for paper-based records and manual processes. Additionally, where Blockchain based platforms such as all the records are natively immutable and are stored on a ledger where they can be audited on demand.
Going paperless and automating manual processes can lead to cost savings. A report by Accenture estimated that digitisation could save asset managers $2.8 billion annually. Implementing blockchain-based platforms can reduce costs further. A study by Santander estimated that blockchain technology could save banks up to $20 billion per year by 2022.
Zero Forex Fee: Some cutting edge fund management platforms such as Tokensphere’s offering come with integrated solutions to call capital on blockchain allows LPs and GPs to call capital from across the globe 24x7 while avoiding hefty FOREX fees and other payment processing charges incurred when using conventional payment providers.
Real Time Transactions: Investors sometimes lose several days and hefty fee when making cross border payments. However, when using blockchain based fund management platforms, transactions could be settled in real time across the globe, allowing for quicker deal execution without needing international investors to go through tedious payment processes and bear hefty costs for international transactions.
Automated and Auditable Distributions: As part of digitising fund operations, the GPs could automate the conventional error-prone and admin heavy process of honouring the waterfall distributions as set out in LPAs in an error free and a much more efficient and cost-effective manner. As Deloitte states, “Instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can easily verify the transactions on publicly available blockchain ledgers such as http://www.blockchain.info or http://www.blockexplorer.com. The automation of this verification process will drive cost efficiencies in the audit environment.”
Streamlined Investor Relations: Digitised fund management platforms can help improve collaboration between LPs and GPs, as they provide a common platform for tracking investments, learning about deals in pipeline, communication, making investments and then learning about how the investments are performing. Additionally, as GPs can make all the distributions and call for capital online, it makes the for an effortless LPs experience throughout the fund lifecycle, allowing them to track and perform all their tasks in a single place.
Enhanced data security: Digital platforms can help to improve data security, as they use encryption and other security measures to protect sensitive data. Blockchain based platforms that operate on a decentralised ledger take this a step further as they are also tamperproof and transparent, which would prevent cooking the accounts and/or help detect fraud early.
Compliance and Reporting: Digitised fund management platforms can help GPs to comply with regulatory requirements, as they provide a way to track and record transactions and to generate reports that can be used to demonstrate compliance. However, as Hywel Ball, EY’s UK head of assurance states Blockchain could take this further, “Blockchain will do for corporate reporting and financial transactions, what the internet did for knowledge. It could fundamentally change the role of the finance function and has huge implications for us as auditors,” He further went on to say this new technology has the potential to transform the speed of corporate reporting as it allows transactions to be recorded and logged in real time, providing greater transparency and trust in a company’s financial accounts. “It could allow a company to publish their ‘annual’ results on an almost daily basis.” Easier auditability and real-time reporting would translate to massive cost savings for the fund / fund managers.
Facilitate Secondaries: By digitising fund operations or even taking it a step ahead by tokenizing fund operations, investors can automate all the time-consuming contractual work that would occur as part of transferring share ownership. According to a study by Setter Capital, the average time to complete a secondary transaction is 18 weeks, as opposed to a few clicks on a tokenized platform.
Limit / Eliminate Human Error: Many analogue procedures are human intensive and despite the greatest care could result in expensive human errors. Digitising processes and automating where possible could result in potential cost savings of hundreds of thousands or millions for larger funds, through avoiding expensive potential errors and reduction in human resources.
While the journey of raising and running a fund will always have its challenges, embracing digital transformation and leveraging innovative platforms can help GPs and LPs navigate the complexities more effectively. By embracing the advantages of digitization, fund managers can focus on their core competencies, improve investor experiences, and position themselves for success in an increasingly competitive investment landscape.