Virtual Data Rooms are Here to Stay
INTRODUCTION
Virtual data room (VDR) software is used by many firms and professionals who utilize an online repository to hold classified information. VDRs allow users to store, access, edit and share information between parties through secure channels from any location and at any time. Examples of some popular VDR providers in the real estate investment space include Intralinks Dealspace, Juniper Square, Datasite, Citrix and Box. Given the growth of data available it is important to minimize the inefficiencies that occur when using multiple systems, therefore Managers should consider the services offered by each of their providers and the objectives each system accomplishes for their organization. When selecting a data room provider, it is essential for a Manager to understand what purpose the data room will serve and how it could create efficiency in managing data for the company. This article will focus on utilizing data rooms as a portal to existing Investors and a tool for marketing new investment opportunities to prospects. Managers choose online data room software to organize all documents and correspondence during the due diligence and investment process in one space, keep the data structured, keep versions updated and better standardize and automate business processes. Additionally, modern day VDR’s have escalated from merely a platform to exchange the documents to a method of contextualizing the investment for all counterparties involved.
As digitalization transforms several industries, the real estate industry faces a foundational re-model that enables technology like VDRs to become increasingly necessary in today’s work environment to meet the requirements of the modern world. Alliance Global Advisors (Alliance) assists Investment Managers in the VDR process by providing data room best practice guidance, providing a matrix of providers in the space with information on each and conducting a final review of the data room before sharing with Investors. In the real estate investment world, Investors now expect VDRs to be available upon request and updated regularly in order to increase efficiency and transparency between Investors and Investment Managers. Documentation that is expected to populate an Investment Manger’s data room include a management presentation, private placement memorandum, due diligence questionnaire, quarterly and annual reports, Investment Committee memos, operational policies and procedures, ESG/DEI policies and procedures and various others that can all be safely uploaded and stored in a VDR.
HISTORY
VDRs originated around the year 2000. Several years prior to that date, before much of the technological advancements in this area, real estate specialists would use physical data rooms to store essential documentation. During transactions, the authorized and interested individuals would have to be physically present in the room to look through hard files. The physical data rooms were only convenient for those individuals who lived proximate to the location, meaning that distance would be an eliminating factor for some investors. The documents were also sometimes delivered by mail as an attempt to solve the distance problem or meet Investor/Consultant regulatory recordkeeping requirements, but this led to an unorganized paper trail and security concerns. Another disadvantage that led to the preference for a virtual alternative was that there was a limited amount of capacity to store data based on the size of the room. In addition, it became tedious to adjust the individuals that had the authorization to access certain documents inside the room, which caused speculation on security. Many of the underlying issues with the physical limitations brought upon by these locations and rooms caused many professionals to look for a more secure, accessible option to store important business documents. As demand increased and technology advanced, we saw the creation of the VDR.
VIRTUAL DATA ROOMS TODAY
According to a report by Mordor Intelligence, the VDR market was valued at $690.59 million in 2020 and is expected to reach $1,607.41 million by 2026, a compound annual growth (CAGR) of 15.12% over 2021 to 2026. North America occupied the largest share of the VDR market due to the increasing adoption of VDR services by various governments and businesses in developed economies, such as Canada and the United States, emphasizing innovation in these existing solutions. In a research report conducted by IBISWorld, in 2021, over $1.0 billion in market revenue was generated from about 383 VDR providers. How an organization structures, accesses and presents its data is critical to managing operations; therefore, incorporating technological advancements in cloud-based data storage rooms allows organizations to operate more efficiently by centralizing data and enabling businesses to execute faster. To share sensitive information with potential investors, private companies can use VDRs and grant access to those who may need to conduct analysis before the transaction can proceed.
Not only have data room technology advancements reduced costs associated with data room real estate and power usage, but they have also allowed companies to practice socially responsible investing (SRI) and take more consideration into environmental, social and governance (ESG) factors. SRI and ESG factors have become progressively vital to the future and projections companies have for themselves. The usage of VDRs shows a commitment to SRI, as the traditional data room leaves much more of a carbon footprint. While advancements in solar energy harvesting and usage for data centers have come a long way, there is still much work left to be done to maximize efficiency. Data room technological advancements are shown to be both cost-effective and environmentally sustainable. With many companies shifting to fully remote work, the ability to securely access confidential documents is paramount. This ability remains of utmost importance to clients dealing with their sensitive information.
Data rooms have been in use for over two decades; during this time they have evolved from a virtual file management system to offer various applications across industries. Data rooms are not an isolated part of the investment process - they enable fundraising teams to contextualize the investor experience that allows investor relations professionals to personalize outreach based on where an Investor is in their process. In the investment management industry, it is vital for firms to maintain transparent relationships with their Investors. Investors are seeking greater real-time visibility into their investments to assess performance, risks and trends within their portfolio. Therefore, data rooms are shifting from a sole purpose of secure document storage to providing Investors with efficient access to the information needed to make better investment decisions.
As technology in data rooms continues to evolve, Managers can leverage critical insights from their systems to determine resource allocation into different asset classes and reducing the friction based on where Investors are spending the most time in the data room. Brandon Sedloff, Managing Director & Global Head of Business Development at Juniper Square states, “Data rooms, when connected to your CRM and investor relations systems, give GP's insights into the investor experience that would not otherwise be possible if your VDR is being used as a standalone document repository." It is important that Managers leverage technology and look at data rooms in the context of their broader business goals and ensure that their data room provider supports those goals from a systems and tools perspective.
TRENDS AND SOLUTIONS
The growth of private markets fundraising and joint ventures with prominent players have fueled the increase in utilization of VDRs in the real estate space. The due diligence process typically entails a large amount of documentation in which investment bankers, investors, investment managers and other parties serve many functions. An additional driving factor for data room utilization is the exponential growth of data generated globally over the past two decades, which is expected to continue its rapid expansion. Therefore, these cloud-based storage rooms have presented a flexible and efficient solution and have been resourceful during a major global pandemic in which remote work became the norm. VDRs solve many problems and concerns that businesses struggled with in the past when using physical data rooms, including security and efficient access to documents.
Security
Businesses are concerned with the security and management of their documentation and proprietary data now more than ever. During the due diligence process, improper mitigation of these risks can take up valuable time and money. The average cost of a data breach worldwide is around $3.8 million, leading organizations to put greater emphasis on having strong data security. Real estate is targeted frequently with ransomware attacks due to the large amounts of client data, significant sums of money in bank accounts and confidential information that can be exploited. Therefore, it is essential to have IT policies and procedures in place and software that has several methods of authentication and restrictions. As with any online process, there is a heightened risk of having the documents and information completely wiped from the VDR; however, in the last ten years, the introduction of cloud computing has eliminated that risk. Even if a document is wiped from a data room, if it was uploaded to the “cloud,” the users of the room will be able to recover the document. Another great feature of using cloud computing is the ability to have as much storage as needed. VDRs have several methods of security to mitigate security risks, such as encryption, two-factor authentication, access restriction, password protection and user permission. This technology enables the sharing of documents on a secure platform so that businesses do not risk compromising their data. This is specifically useful during M&A transactions because the technology allows for easy access for interested parties after signing nondisclosure agreements (NDAs).
Accessibility and Efficiency
A significant benefit of using VDRs is potential Investors from across the world can gain access to the documents instead of only those within accessible distance from a physical room. This ultimately increases the universe of potential Investors that could evaluate investing in a certain project. Those who own the data room can see who has accessed it, how frequently they visit and their time reviewing each document. An administrator of the VDR can create a document structure, set user access permissions, and set up NDAs to be signed by users. Each file, when stored in a VDR, has coded instructions attached to the file called metadata. Metadata determines where the file lives, how easy it is to remove the file from its ownership hierarchy and other processes that make data management easier. The importance of metadata in a data room coincides with user permission. Some data room providers, like Juniper Square, can attach a document to a position level, which means that if the position were to change the file only needs to be altered once in the beginning and it will automatically update with any changes. Alliance provides guidance to real estate Investment Managers on user permission and identifying which documents to send to prospects and at which point in time during the due diligence process. A VDR also automatically generates reports which can help a company strategize and predict the possible outcome of deals in action. The increased level of accessibility from VDRs enables companies to speed up assessments, auditing, acquisition processes and a record of all the conversations involved within the process from different stakeholders. Additionally, the cost saved by opting for VDRs rather than the traditional data room is seen in several ways. VDRs decrease the need to organize multiple stakeholder meetings for each real estate acquisition phase and reduce travel costs that a traditional data room would require.
CONCLUSION
Real estate specialists and other professionals across various industries handle vast amounts of sensitive documentation. VDRs provide an efficient solution to the issues that arose from physical locations. High professionalism, data security and business transparency play a vital role in business transactions. VDRs are here to stay due to the increasing reliance on cloud-based storage and the benefits that come with modern technological advancements. VDRs have revolutionized the transaction process in today’s investment environment and data rooms have evolved to become a tool that not only stores information, but helps facilitate an entire deal. To stay competitive, Investment Managers must use these innovative tools to their benefit. Alliance has created a comprehensive matrix of various data room providers, best practices to abide by when navigating this software and assistance in building out the list of documents that is expected to be seen in a VDR.
ABOUT ALLIANCE GLOBAL ADVISORS
Alliance Global Advisors is a women-owned consulting firm focused on developing strategic growth solutions for real asset investment managers. Advising Clients with over $400 billion in assets under management, Alliance partners with organizations to provide an informed, independent perspective, continued education and an innovative approach to attracting capital in a competitive market environment. Our experienced team is committed to empowering the real asset investment community to elevate best practices. Our partnerships allow senior management teams to focus on what matters most: diligently managing Investor capital, creating value and delivering exceptional returns in a performance-driven market.
Disclaimer: This blog was originally published in June 2022 and will be updated periodically to reflect changes in the industry. The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.