Ready for Boarding — How the admission of fund investors can be digitized
If the fund manager can offer his investors an easy, contemporary onboarding process — compared to one that costs them a disproportionate amount of work — then onboarding has just as much of a competitive and therefore fundraising factor as a convincing pitch deck or PPM. Onboarding that facilitates the collection of complete and correct information and avoids errors right from the input stage therefore not only helps the investor, but at least as much the fund manager. Today’s optimum must be measured against the criteria of legal conformity and investor friendliness.
The aim is simplicity, clarity and less effort for everyone involved. Consider the heterogeneity of investors in private equity and venture capital funds. At one end of the scale are large institutional investors for whom investing is part of their daily business. In addition, there are investors with investment experience who invest via companies in a wide variety of domestic and foreign legal forms. And finally, at the other end of the scale, the first time investor, who invests as a natural person. But they all have one thing in common: the need for simple, clear processes that require as little effort as possible. ‑Followed by clear processes and responsibilities.
A clear process means that investors know their contact person at every step of the process and that responsibilities are clearly assigned. In this respect, there is a convergence of interests with the fund manager, who should not be unnecessarily distracted from “actual” fundraising and investing by onboarding.
The use of digital potential also applies: interfaces, automation, transferability and reusability of data. For a long time, there was a lot of room for improvement in onboarding processes in particular, as many investors shared (and still share) their information with the fund manager by filling out long PDF documents that only “take the filler by the hand” to a limited extent. However, the venture capital and private equity market has now recognized that the interest in a lean, clear process can best be realized digitally.
The optimal onboarding portal offers a high level of functionality, allowing investors to click through the necessary information intuitively and quickly without the need for further advice and requiring them to provide as little evidence as possible themselves. A portal that offers (external) identification solutions or even links to commercial register procedures can also shine. At the same time, legal certainty for the fund manager and the investor must be guaranteed in the same way as if every piece of information were obtained and confirmed on paper. It is also no longer a side issue that onboarding portals must comply with data protection regulations and offer a high level of IT security for sensitive data.
In view of the fact that onboarding involves securing the subscription of a sum of at least six, often seven or eight figures over several years, legal security, data protection and IT security must take precedence over ease of use and functionality if there are conflicts of interest between these requirements. However, current legal developments in the area of digitalization give us hope that there will be fewer conflicts between these objectives in the future.
Dr. Stephan Schade is a lawyer and partner at POELLATH. His particular focus is on advising on fund compliance, especially in the areas of data protection, money laundering prevention and regulatory reporting obligations.
You can read the detailed article by Dr Stephan Schade and his two colleagues Katharina Hammer and Dr Philip Schwarz van Berk (both Pöllath) on the topic of “Ready for Boarding — How the admission of fund investors can be digitized” in the new issue of FYB-2024 and/or order it as a PDF! See FYB store.