Women in PE Summit recap: LPs still have the upper hand and AI is top of mind

Sar Ruddenklau
Sar Ruddenklau
March 13, 2024

Private equity continues to face some of the toughest fundraising conditions in years, but the mood at the Women in Private Equity summit on March 4-6 in Phoenix was upbeat. GPs and IR professionals are acutely aware that only the top performers will succeed in hitting targets and timelines, and they’re finding creative ways to find and engage LPs.

While it was mostly agreed that exits are likely to come back in the second half of 2024 and provide some relief to the liquidity squeeze, investors still have the upper hand. They have the luxury of being able to wait, with some panelists reporting that LPs are waiting for funds to be up to 40% committed before making a decision to avoid investing in a blind pool. While a “no” from an investor is sometimes inevitable, panelists urged attendees to keep in mind that investors are doing their best with limited cash flow and are extra judicious about where their money is allocated.

And re-ups are far from guaranteed, which means GPs are still having to pull out all the stops to not only find new investors, but also to keep the ones they have happy. This opens opportunities for GPs to find ways to become a true strategic partner to their investors and treat them as more than just capital in a bucket.

It came as no surprise that AI crept into the conversation on many panels, whether they were focused on the topic or not. LPs are starting to ask questions about how GPs are leveraging AI tools to create value in their portfolio companies and efficiencies in their own operations and how they are weighing up the risks, with one panelist reporting that she received her first AI DDQ from an investor.

To deal with fundraising’s new era, transparency is key

Investors have multiple GPs vying for their attention. Their inboxes are noisy and their calendars are full. In a crowded fundraising market where there’s $1 supply for every $3 demand, easy fundraises are the exception, not the rule, and the bar is higher for proving that historically good returns are a predictor of future performance.

While performance is objective and can be benchmarked against peers, investors on WPES panels reported wanting to clearly understand GPs’ people, process, and philosophy from the outset. GPs need to work at building conviction in their investments by building trust with their investors both during and between raises through transparent communications and frequent updates. 

GPs who stand out are those who can provide long-term value through returns — “DPI or die”, as one panelist bluntly put it — and are also consistently dedicated to their portfolio companies.

This needs a “show, don’t tell” approach, with data backed by qualitative reporting on portfolio companies’ successes and their headwinds. One panelist recounted a strategy they employed during COVID where they produced whitepapers on each of their portfolio companies to outline the individual challenges the pandemic created and how each company was planning to tackle them. It was so well received by her investors it’s become a permanent part of their communications strategy.

And while amplifying successes is important, being transparent about mistakes is equally so. The best GPs express humility and know how to show what they learned from them in order to course correct. 

Investors are looking for long-term partnerships, not just transactions

According to investors on WPES panels, the GPs who stood out during fundraising were the ones who listened, did their homework, and showed that they understood an LP organization’s priorities and mission.

A prominent institutional investor reported that her organization actively searches for GPs who can allow them to become strategic partners. She looked for managers who “needed to need them” so they are not just “capital in a bucket”. The most successful partnerships she had built were with GPs who listened to the organization’s earnings calls or read annual reports, then came back to her with suggestions to address pain points raised in them.

GPs need to excel at pitching their competitive edge alongside their track record. It’s crucial to prove why your strategy will be successful not only in the current market, but also in future market conditions. The deciding factor for an investor could be whether you can convince them your performance is down to skill and not just luck, especially in a down market.

Showing that you understand an institutional investor’s mission and mandate sends a message that you’re committed to being the best strategic partner for them. try to understand their portfolio and speak to how you can add diversification, and don’t expect a non-profit pension plan to spend $100 on an Uber to come meet you, make the time to go to them. 

One representative of a health fund recounted that the average annual income of their members is $30k, while a hip replacement for them costs $36k. She keeps that written on the wall in her office and uses it to guide how she invests every dollar for the fund.

Generative AI was hard to avoid, but approaches are still conservative

While attitudes and approaches to implementing and investing in AI varied across panels, it came up in conversations on all stages of the fund lifecycle. Private equity funds are racing to understand the impact that advances in AI could have on portfolio companies, but they’ve made only tentative progress in using AI tools to improve their own operations, like sourcing new investments.

Some panelists cautioned about the typical S-shaped hype cycle of tech adoption, however most agreed that we’re in the acceleration phase of the curve and companies that don’t make moves to adopt it now have the very real chance of being left behind. Access to data is no longer where the value lies, now it’s valuable to have the tools to be able to have a conversation with the data.

One panelist gave an example of a proprietary AI tool her firm has developed to deal with repetitive data management tasks. In order to minimize the learning curve, and encourage creativity and critical thinking, they’ve developed a library of pre-trained prompts. Their goal is not only to increase productivity in-house, but also to understand first-hand how to leverage AI to become a better advisor to their portfolio companies when they look to implement it.

While AI offers a blank canvas for designing ways to reach desired outcomes rather than just point solutions, there needs to be a solid business case and both the upsides and risks of each use needs to be considered. For example, using GAI to create summaries of publicly available data has a different set of benefits and risks to using confidential data to generate an investor pitch deck.

Still, conversations with a range of WPES attendees reveal many are in the pilot phase of implementation, experimenting with quick wins and efficiencies that can boost productivity. The higher pursuits of gleaning more intelligent insight through AI remain, largely, still to be cracked.

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