This past year has changed the way LPs invest and operate by highlighting the importance of technology on an operational level and as an investment strategy. From the ways in which it impacts fund analysis and due diligence, to the risks and opportunities it poses as an investment possibility, LPs are re-examining the options and rethinking their approach.

These issues were explored in a panel discussion I moderated at the recent SuperTechnology North America conference. In "LP views on technology: from investments to operations," a group of North American LPs discussed the ways in which technology was changing the way they operate and invest. Here are some of the highlights of the discussion.

Lasting impact on investment operations

Panelists unanimously agreed that the shift away from in-person interaction with GPs is likely to continue for the foreseeable future.

A flash poll conducted during the event revealed that three-quarters of LPs (75%) felt that investment due diligence was the operational activity most impacted by remote working, while only 13% chose portfolio monitoring and a further 13% chose stakeholder and board meetings and reporting.

The consensus among panelists was that virtual due diligence is not a short-term trend and will become the new normal among LPs. Describing the due diligence process, one panelist said, "It's great to be able to see someone and look them in the eye during a meeting. But it used to take an entire day to have three meetings in one city. Now I can have multiple meetings in multiple cities in the course of a day."

A technology-enabled approach has also broadened the horizon for LPs by enabling them to conduct due diligence and close business anywhere in the world while keeping travel and other expenses to a minimum.

Emphasis on transparency

Without as many (or, in some cases, any) opportunities to discuss investment opportunities face-to-face, investors are placing higher expectations on their GPs in terms of compliance and transparency, including access to timely and complete data on fund performance.

By extension, this shift towards more data-driven reporting and communications is motivating LPs to invest in digital tools that enable them to monitor, analyze and act on the data they receive.

Uncertainties around allocations

While there are many new questions around the role technology plays in LP operations, there are just as many around the role it plays in allocations.

The panel agreed that every institutional investor needs to be invested in technology, but agreed that setting an investment strategy is not straightforward. Technology has evolved from a pure play to something more complex and amorphous. As one panelist expressed it, "'Technology', as a standalone sector, doesn't exist today. There are infrastructure investments, buyouts and start-ups that are undeniably linked to technology. The category is expanding far beyond its current definition." Some investors are now retaining consultants to help them diversify their technology exposures in private equity.

The current sky-high valuations for tech present challenges too. LPs must make a reasonable determination if tech valuations are an aberration or sustainable. Valuation multiples may yet pull back from today's levels, but still remain high relative to historical norms, in which case entire portfolios could be mis-priced. However, LPs must also consider that multiple expansion in tech provides perhaps one of their best hedges against multiple contraction in other sectors of their portfolios.

Technology - disruptor and enabler

Technology has long been seen as a disruptor. However, as investors emerge from a tumultuous year, technology has also emerged as a vital means of combating the disruption caused by unexpected economic and operational challenges. As LPs adapt to virtual operations and a fast-evolving investing landscape, they are taking a deeper look at technology's potential to help them manage change, strengthen performance and identify new opportunities as they arise.

Posted 10 March 2021 by Chris Sparenberg, Head of iLEVEL, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.