December 16, 2020

Trends in Private Capital Markets: 2021 & Beyond

Troy Pospisil, Founder & CEO, InCloudCounsel

As the calendar marches closer to 2021, and we contemplate the past year of unrelenting and unprecedented change linked to a global pandemic, it feels like the right time to turn our sights forward, and to make sense of patterns being established now that will undoubtedly impact the next few years in private capital markets. 

How will data and technology continue to evolve traditional models? What are the keys to succeeding in an increasingly competitive environment? What considerations should be given to cybersecurity concerns?

I sat down (virtually, of course) with Alice Murray, Editor of The Drawdown, to discuss major trends facing private capital markets over the next few years, and there are four areas I see as critical:

Competition 

It’s no secret that the private funds asset management landscape is growing. Over the past several decades large capital allocators have continued to increase their investments into private funds. What had been a small, esoteric asset class 40 years ago is now one of the largest, if not the largest for many investors. With that has come a flood of new competition in the private capital markets across every asset class – private equity, growth equity, private debt, infrastructure, and real estate, among others. 

What does this flood of competition mean for you? It means that you have to be unrelentingly focused on being better. That means being better at every aspect of what you do, whether that’s raising capital, sourcing new investments, or structuring deals. It also means focusing as much of your team’s time and energy as possible on those activities that are most aligned with your unique strategy and value drivers.

If you are organized and have the data on what you’ve done historically in all of your key agreements and are proactively managing your obligations to important counterparties and regulators, you’re going to be better. Investors, portfolio companies, and deal sources will see that you’re more organized, solidifying their trust in your relationship.  If you can quickly benchmark against what you’ve done in the past, you’re going to be better at negotiating your most important agreements – resulting in better economic and legal terms, more favorable covenants, and ultimately better returns. 

If your team has optimized your time-consuming, repetitive processes, you will have more time to focus on activities that create real value. Your goal should be to have everyone in your organization spending as much time as possible on those activities that have the largest and most direct impact on generating superior returns. If your team is bogged down by activities such as processing repetitive agreements like NDAs or basic IT issues, you are sacrificing precious time and energy away from finding new investments or supporting your portfolio companies with growth initiatives.  

Digitization 

Digitization is a word that gets thrown around a lot, but there is no denying that COVID-19 has put digitization into warp speed. Digitizing every single process within an organization is inevitable and the move to a virtual work environment makes it critical.  Any process that was or is happening via physical paper, phone, email, or stand alone Word and Excel fires is going to be digitized into more efficient workflows. This will result in more data, enhanced collaboration, and massive gains in efficiency. Of course, digitization ultimately enables you to be better at…

Data-driven decision-making 

If you look at any investment firm, the number of sources of data that they are using to make every decision – but investment decisions in particular – is astounding. The most sophisticated private equity firms and hedge funds now have dozens if not hundreds of data subscriptions they are using to make more data-driven decisions about customer behavior, industries, companies, particular securities, limited partners, etc… and that will extend into every part of the business. 

When it comes to legal contracts, you are in a stronger position when you’re able to negotiate from a more informed, data-driven perspective. At InCloudCounsel, we are especially focused on this challenge.  We help our customers make better data-driven decisions across all aspects of their business by turning contracts into actionable intelligence and delivering the data management, reporting, and workflow tools necessary to maximize the value of contract data.  Of course, there is no thornier issue right now than…

Cybersecurity 

Although InCloudCounsel is not a cybersecurity provider, we invest a great deal of energy and money into making sure all of the data that we touch on behalf of customers – along with anything that happens in our organization – is secure. Private equity firms and anyone who is managing sensitive information (and I don’t think anyone would argue that any type of investor doesn’t have very sensitive information sitting within their organization) need to get smarter on this. 

Lip service won’t cut it when it comes to security. Leaders in every organization need to educate themselves on the risks that are increasingly present within enterprise environments, and they need to make sure they’re doing everything they can to secure their data and their investors’ data. Part of that means partnering with service providers who are taking it as seriously as they are.

As we look to 2021 and beyond, private capital markets offer more opportunity than ever before, but the organizations that stand to benefit the most have a few things in common: they are innovating to stay ahead of the competition, they rely on data and technology to make better decisions, and they are staying ahead of the curve on mitigating data security risks.

If you’d like to hear more of my conversation with Alice Murray about private capital markets, you can listen to the three-part series:

Part One

Part Two

Part Three