For a child poised to start a complex LEGO set, their success depends not just on their experience, but on having all the right pieces, organized efficiently, and a clear instruction manual to follow. Without them, they’re left with a disorganized pile of colored bricks of various shapes and sizes and a lot of “free play.”
Similarly, in the sophisticated world of private funds, even the most skilled professionals can benefit from the guardrails of enabling tools — contract management expertise and tech, data, and knowledge artifacts — to increase their efficiency. Much like the public markets — where technological innovation was born out of a necessity to develop systems capable of handling vast numbers of smaller transactions efficiently — private fund managers can adapt and leverage tailored tools to enhance consistency, operational efficiency, and legal repapering processes. This approach enhances auditability of processes in a landscape under increasingly close scrutiny.
This is particularly true regarding secondary market activities relating to private funds and limited partner transfers. When implemented effectively, a scalable and responsive contracting ecosystem can reduce negotiation times, leading to shorter contracting cycle times, quicker transfer completions, and a reduction in cost per transaction compared to law firm outsourcing. Moreover, leveraging technology in this ecosystem not only enhances its robustness but also ensures a comprehensive, auditable paper trail in an industry where trust and diligence are paramount.
This article explores how, by systematically arranging the “LEGO bricks” of your transactional framework, you can achieve contracting efficiency in private funds.
Efficient customization
Like pieces from a limited-edition LEGO collector’s set, every portfolio building block in the private fund transfer landscape is different, yet the overall assembly process remains largely consistent. However, it’s not necessary to treat this process as entirely bespoke and therefore expensive. The goal is to standardize the process and not the players involved, mirroring the approach regulators take with retail investors. This standardization allows for efficiency without compromising the specialized nature of each transaction.
By centralizing their document management and automating categorization into a coherent system, fund managers can better evidence equal treatment of investors and enable efficient information retrieval. This approach also provides the transparency needed to satisfy any potential regulatory scrutiny.
A data-driven approach to maintaining these documents and enabling artifacts is crucial in this process. This method not only organizes information but also captures data and learnings while the work is being done, enhancing both current and future transfers. By collecting and analyzing data from each transaction, fund managers can track investment performance, identify trends and opportunities, and allocate resources more efficiently.
Furthermore, automated categorization of qualified documents to identify provisions and analyze clauses enables more informed decision-making. This technology-enabled approach not only speeds up the review process but also ensures consistency in interpretation and application of contract terms across different transactions. Crucially, it improves due diligence — a process notorious for its mind-numbing comprehensiveness.
Creating the playbook
Any LEGO creation starts with a detailed blueprint. In the same vein, a centralized knowledge base of standardized private fund contracting processes improves the ability to keep pace with a higher volume and increased complexity of work.
Ensuring your processes are codified, articulated and accessible to those who need them also facilitates onboarding new funds or clients in the secondary market and enables faster secondary transactions. This standardization forms the foundation of an efficient contracting ecosystem.
Building upon this foundation, best practice entails creating and maintaining a repository of common scenarios and preferred responses, even though each fund typically has its own form of transfer agreement and Subscription Agreement. This approach expedites negotiations and provides consistency across related transactions.
By leveraging this structured approach, teams can efficiently utilize data collected from due diligence to drive efficiency while still maintaining the flexibility to adapt to each fund’s unique legal clauses and requirements. This balance between standardization and customization allows fund managers to effectively train new staff to these standards, ultimately supporting a more efficient overall contracting environment.
Laying the foundations
Just as a LEGO builder starts with a sturdy base, private fund managers must establish a robust contracting ecosystem and process, to avoid contracting logjams, particularly at quarter end.
Legal bottlenecks are frequently compounded by inconsistent and unsustainable contracting practices that can negatively affect transfers. When multiple parties are involved in transactions, as is often the case in private funds, these critical hurdles can multiply exponentially, further slowing down processes and potentially damaging investor relationships.
To address these challenges, it’s crucial to shift from simply handing the work over to outside counsel to building a sustainable process. This approach involves discerning between complex, nuanced legal work that requires external counsel’s expertise and more routine, “assembly line” tasks that can be efficiently handled by internal specialists or by integrating dedicated service providers. By strategically allocating work, firms can rely on outside counsel for the “hard yards” — complex legal issues and high-stakes matters — while developing internal capabilities or partnering with specialized service providers for more standardized, volume-driven tasks.
The solution is to implement systems that automate and streamline key steps in the transfer process. This includes automating routine tasks with AI-powered technology, integrating expertise for a flexible capacity lift, and establishing consistent metrics for investment performance benchmarking. By creating these efficient processes, fund managers can scale their operations more effectively, handling higher volumes without compromising quality or compliance.
This approach not only alleviates the pressure on legal teams but also creates a more streamlined, consistent, and sustainable contracting process. It enables faster negotiations, reduces the risk of errors, and ultimately leads to smoother transfers and improved investor satisfaction.
Bringing in reinforcements
There’s a reason LEGO is often leveraged in team-building activities: it is rarely a solitary pursuit. When overburdened with transactional legal work, many companies turn to quick fixes such as expensive law firms. While these solutions may offer short-term relief, they often fail to address the underlying lack of a sustainable contracting process.
Instead, integrating experienced team members equipped with AI-integrated tools can provide an immediate capacity lift at critical times while contributing to the development and refinement of standardized processes and knowledge bases.
By combining the technological capabilities of an AI-enabled CLM (Contract Lifecycle Management) system with the nuanced understanding of human experts and efficient processes, fund managers can navigate the complexities of contracting more effectively. In this ecosystem, AI serves as the intelligent foundation, upon which the various elements of the contracting process are assembled and interconnected. This approach ensures compliance, reduces delays, and accelerates transfers, while also enabling innovation and market expansion.
Integrating talent and tech
Building a sustainable, efficient, repeatable contracting “ecosystem” that encompasses expertise, data, tools, and knowledge artifacts ensures the overall efficiency and effectiveness of the contracting process.
When the right people, tech, and processes come together, they create something far greater than the sum of their parts ii much like a complex LEGO creation.
By focusing on building this integrated ecosystem, fund managers can construct a powerful, adaptable, and efficient operational framework that not only meets today’s challenges but is also flexible enough to adapt to future changes in the market and regulatory landscape.
Bernardus Buys is a private markets expert working with Factor on Primary and Secondary Market solutions within Asset Management.
Originally published in Alternatives Watch
