What if you could price a portfolio of 100 private markets fund interests in 60 seconds? It’s a compelling thought in a market where such an exercise may take two weeks and hundreds of hours of collective human resources.
The implications for LP secondaries trades would be immense. Buyers possessing such a capability could sidestep auction processes and make serious offers for portfolios before competitors have even fired up their laptops. Intermediaries whose clients are in need of a quick sale process may be incentivised to approach firms with such capabilities first, rather than launch a lengthy fully fledged auction.
As of mid-June 2023, Secondaries Investor has not directly seen any tangible examples of how artificial intelligence and machine learning can be applied to LP secondaries trades. This doesn’t mean there aren’t firms in the market attempting to do so.
As we reported this week, Clipway, a London-headquartered investment firm, has assembled a high-profile team of former Ardian, Coller Capital and Rothschild Five Arrows executives to launch what Secondaries Investor understands is an AI-driven approach to pricing LP portfolios. Clipway is understood to be eyeing a $1 billion first close on its debut fund by the end of the summer. We’ll be keeping our eye on this firm closely.
Clipway won’t have been the first to apply technology to LP portfolio trades and it likely won’t be the last. Swiss asset manager Bellevue, which launched an LP secondaries business in January with the hire of a trio from Partners Group, says it uses “sophisticated quantitative financial modelling and valuation tools” and the “systematic gathering of a multitude of data points” to enable it to more efficiently analyse portfolios of fund interests and price them.
On the intermediary side, Secondaries Investor is aware of at least one large advisory firm that uses data analytics internally for LP portfolio pricing. At least one new entrant appears to be doing this too: Tap, a digital trading platform for LP secondaries, says its pricing database and tech offering helps broaden the number of potential buyers of a fund stake, although Secondaries Investor does not have specific details of how this works.
Before those without an AI-driven secondaries-focused tool throw in the towel, it’s worth remembering that the secondaries market remains a human and relationship-driven one. There is non-public information that is not available to AI; qualitative information about a portfolio or fund manager that can’t be captured in an algorithm; and the commercial reality that a deal might not always be won by the fastest mover or the highest bidder.
That said, the LP portfolio market is ripe for tech disruption in multiple areas. Legal processes surrounding transfers remain inefficient and cumbersome; non-disclosure agreements can still take up to three weeks to clear; updating the data room of a portfolio of fund stakes can be tedious, clerical work if not outsourced to a third-party.
Firms that successfully deploy any form of technology to an inefficient financial market will have history on their side. With generative AI evolving every day, there’s every chance the LP secondaries market will look somewhat different in a year from now.
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