The public markets have been in turmoil due to Ukraine / Russia tensions as well as investor skepticism when it comes to technology valuations and outlooks. But private equity is far from slowing down. We saw just this week that
Anaplan is to be Acquired by Thoma Bravo for $10.7 Billion.
This is a crazy headline and has only proven that with tech companies down more than 50% from their October 2021 highs, this is a lucrative time to take advantage of the public markets.
Let’s switch gears for a second to take a look at the private equity industry as a whole.
The 2022 Dechert Global Private Equity Outlook Report states, “The global private equity industry is scorching hot”. And this is certainly the case. Q1 – Q3 of 2021 saw ~$1.2 Trillion of investment value, beating 2007’s ~$850Bn by a wide margin. With no shortage of interesting founders and ideas, private equity firms are looking to fundraise, evaluate investments, deploy capital, and exit with greater fervor and passion than ever before.
In this post, we are going to look at investment management software.
What you and I probably don’t think of when considering the investment process, is the software individuals and firms actually use to manage investments, make updates, communicate with LPs, and deal with all the administrative and operational tasks associated with making investments.
The actual keeping track of investment information and associated workflows, value changes, tax and legal documentation, and more can be an extremely time-consuming process and involves many different platforms. These products are outdated, out-of-sync, and create substantial time inefficiency and issues in the investment reporting and management workflow.
Enter Arch, next-gen financial software for private investors that tracks data on private investments on one single platform. Arch's automated system enables investors to manage new investments and make updates, collect K-1s, manage cash flows and capital calls/distributions, review financial statements, and provide reporting-ready data all in one place.
Arch fundraised $5.5 million in fresh seed funding to help bolster the company’s growth. Craft Ventures led the round along with angels such as Warby Parker co-founders Neil Blumenthal and Dave Gilboa, Carta CEO and co-founder Henry Ward, Harry’s founder Jeff Raider, Allbirds founder Joey Zwillinger and Doordash founder Tony Xu.
In simple terms, Arch manages all documents and communications, providing better organization, data, and insights for private investments and the people who manage them. Arch offers 3 different flavors of its product for advisors, accountants, and individuals. The platform allows users to manage and track incoming requests that require action, assign responsibility to them, track their completion, communicate with LPs, automate tax document collection, and more. Arch has a wide range of additional features that span all of its product offerings including capital call management, distribution management, investment updating, anomaly detection, investment archival, automated account updates, and TLS 1.2 grade encryption.
According to PWC’s The Future of Financial Services Report, AUM for alternative asset classes (comprised of real estate, private equity, and private debt) will reach $19 Trillion by 2025, accounting for 7% of Total Global AUM. One of the most important points the paper makes is that financial firms and advisors must embrace technology as it “impacts all functions and will determine if they win or lose in this fast-changing environment.” As total capital put to work in the private markets continues to grow, investors and advisors will prioritize solutions like Arch for digitizing and automating the pain points in the financial advisory software world. The Bain Global Private Equity Report 2021 even states “PE firms need to accelerate their plodding transition from analog to digital”, not only in the software they use to evaluate potential investments but also to manage their existing ones!
As a function of this increase in total investment in assets globally, investors worldwide need reliable software tools that can analyze and record investment data for related actions and next steps. Arch plays within this space and by 2025, the Global Investment Management Software Market is expected to reach $5.8 Bn according to Report Ocean.
Growth Opportunities
With a product as deeply integrated into the foundation of an investing practice as Arch is, there are many logical growth and expansion opportunities for the company to pursue. It should go without saying that Arch should continue to grow its customer base domestically and abroad, improve customer feedback and retention (/ reduce churn), and refine its existing offerings. With the new funding Arch raised back in December of 2021, Arch will hire new talent in operations, partnerships, and engineering. Additionally, they plan to add support for a wider base of institutional investor types, including foundations, endowments, and pension funds. With a wider range of product types for its end users, Arch will also hire a full-time salesforce to sell to new and existing end users more efficiently.
In terms of logical growth routes, I’d split opportunities into two buckets: 1) near-term logical add-ons/improvements to existing offerings and 2) longer-term, new products and thus new markets to explore.
First, in the existing offering add-on space, Arch could look to offer 1) cash flow optimizations, 2) advanced analytics, and 3) public market index benchmarking / optimization.
On the new offering front, Arch could build a neo-banking-like product for high net worth individuals, wiring functionality, and tax and estate planning. The final two expansion opportunities are deal flow / secondary marketplaces and credit products. I am less passionate about these two as I believe there are many levels of complexity to work through and would require the participation of numerous stakeholders and multiple years of product iteration.
Now for our risks and considerations. Investors of all sizes have been making investments for hundreds of years. The financing of the Transcontinental Railroad is a great example of what some consider to mark the origin of modern private equity.
From individuals and angels to family offices, to small firms, to firms with thousands of employees and hundreds of billions of AUM; investors come in all shapes and sizes and have had to utilize existing software solutions to meet their investment administration and operation management needs.
The question is,
Who is Arch targeting with their product and who can they expect to abandon their existing solution?
Would the individual investor who uses an excel spreadsheet for free jump to Arch? Or would a subscription fee be enough to dissuade them, sticking with spreadsheets instead?
Would a firm as large as Blackstone or Morgan Stanley with hundreds of billions of AUM be willing to migrate from their existing solution (no matter how antiquated) to start using Arch?
It seems that Arch might be more likely to appeal to family offices. Investors that have small, niche administrative back-office systems that would be willing to migrate to a new platform and could justify a subscription for increased convenience. This is important as Arch and investors consider its target market and sizing.
Arch is a fascinating product that frankly, I am surprised has not been built sooner. With record levels of capital being deployed by firms and funds of all types, a software solution that saves time and effort related to the pain points of investment operations and administrative tasks is sorely needed. Arch is still extremely young in its lifecycle; in the coming years, Arch will grow rapidly as they bring on a dedicated salesforce, invest in R&D, and scale. I am excited to see if Arch can help modernize and improve the investment and administration and operations experience so that investors can spend more time investing in fascinating ideas and less time managing them.
This weekend I got the chance to
Test my one-mile track sprint speed (clocked a 5:46) - all-time fastest is 5:25
Hang out on some NYC rooftops with friends and enjoy the warm weather
Go to an absinthe tasting and meet a bunch of new people
The absinthe bar was super cool - there are myths that say absinthe causes hallucinations!
GW
