The FTX fallout and how it will shape GP/LP operations

The FTX fallout and how it will shape GP/LP operations

FTX’s position as the world’s second-largest crypto exchange has taken a nosedive over the past few days, a journey full of twists and turns before they finally filed for bankruptcy. As investors grapple with the ongoing FTX meltdown, analysts all over the world have likely spent the last few days (and nights) frantically number-crunching to calculate their LPs’ exposure, while Investor Relations teams have been working overtime on damage control.

When shock events like these occur, the aftermath reshapes the landscape of the private markets to a certain extent. As an investor, it’s impossible to control external events of this scale – but it is definitely possible to safeguard your operations so that you are prepared for when things implode for a particular industry or company.

In this case, the FTX fallout will significantly impact GP and LP operations in a number of ways. Below is Quantium’s view on how things will change:

Impacts on GP Operations:

1. Investment managers need to own their data and be able to access it quickly. 

While recent trends have been skewed towards outsourcing to third party administrators, fund managers need to have an in-house, centralized source of truth for their investment operations. With an event as cataclysmic as the FTX meltdown, you simply cannot afford to wait 2-3 days for your administrators to compute how much exposure your fund(s) has to the asset; you need the information available at your fingertips.

It is also essential to have data on both 1) the individual fund level and 2) aggregated across all funds, to prepare immediate and well-informed disclosure statements for your investors.  

2. GPs will need to track their LPs’ exposure right down to the asset level. 

GPs not only need to track exposure at fund level, but also exposure for individual LPs. In many cases, investors commit across multiple funds which have varying levels of exposure or crossover investment to a particular asset, industry or geography.

When there is an event in a particular company/industry/geography and you are making a call with each investor, are you able to quantify the dollar value and percentage exposure each client has to a particular industry – for example, can you clearly pin down whether the individual LP’s  aggregated exposure to crypto is less than 2% across all funds? In turbulent times, the ability to provide investors with transparent and accurate information in a timely manner will help both to reassure them and also ensure they remain confident in your firm’s abilities.

3. LPs will demand more transparency on individual companies. 

This is an existing trend that will accelerate rapidly in the wake of the FTX saga. In a nutshell, LPs will demand a much more thorough understanding of their portfolio. Thus, they will expect a whole new level of detail in their portfolio reporting that goes well beyond basic information such as company description, high-level operating metrics, investment fair market values and MOIC. They will want far more disclosure such as operating metrics, balance sheets and other governance-related information at the individual company level.

Impacts on LP Operations:

The FTX events will also prompt LPs and asset owners to further track exposure at the look-through asset level. In addition to the above disclosure of company information, you need to be able to know how much exposure you have across all investee funds that are related to the particular asset or industry under scrutiny, and whether the valuation methodologies across different managers are consistent or whether re-valuations are necessary.

As an LP, access to the above information is crucial – it will give you the timely insights you need, enabling you to take immediate action to safeguard your investments. 

Investment managers are in the business of taking risk, and market-changing events will of course continue to happen. But as investors, it is important to set up your operations in advance to pre-emptively manage your risk, so that when these events
do happen, you are fully prepared with all the information you need to keep your investors updated. This will help your firm navigate turbulent times successfully through proactive portfolio and investor management. 

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