Technology transformation in private equity (PE) – How fund managers and investors can turn challenges into opportunities

As part of the BAI Anniversary Brochure 2022, AssetMetrix’ Chief Technology Officer Dr. Dimitris Matalliotakis shared insights on the topic of technology transformation in private equity.

In the article, he explores the reasons for the evolution of PE from a low-tech to a high-tech industry, highlights the challenges and, most importantly, opportunities for the adoption of technology.

The use of technology is advancing in all areas of the financial industry. Although the PE sector has also recognised potential, comprehensive digitalisation has not yet taken place. This article looks at the reasons that are driving the development of PE from a low-tech to a high-tech industry. It also looks at the challenges and, finally, at promising opportunities in various fields of application that arise through technology integration.

Private Equity – from Low to High Tech?

While some financial services sectors have been early and consistent in their use of technology, PE is still largely considered a low-tech industry. Compared to liquid markets, where vast amounts of data are available, Excel spreadsheets were sufficient to manage data in PE until recently. Another reason can be found in the small team size of pure asset managers, who often do not have the necessary technological resources at their disposal.

In the Intertrust Group’s “The future of fund technology” study from 2021, more than 60% of the fund managers surveyed said they would have to invest significantly in technology in the next few years in order to meet the increasing demands of their investors:

Figure 1: Survey of 300 GPs worldwide: likelihood of investing in technology over the next 5 years

Source: The future of fund technology, Intertrust Group (2021)

Regulated investors in particular require a wide range of reports, analytics and KPIs to meet regulatory obligations. They are demanding the implementation of technology-driven central data storage systems from their fund managers to ensure this.

With the continued growth and competition in the PE industry, there has also been a need for GPs to reduce costs and increase their own operational efficiency. Successful fund managers now have to manage more and larger funds, which means more clients, service providers and data. This increases the pressure to use modern technology, as the rising amount of data and number of clients makes it difficult to work in an analogue environment.

Figure 2: Global private capital raised (2003-2021)

Source: Global Private Equity Report 2022, Bain & Company

In recent years, however, tech investments have become indispensable: During the pandemic, most companies were forced to send their employees to the home office. Increased attention was paid to secure, stable systems that guarantee system and process security at all times. To achieve this, processes have to be redefined. An example of this would be a workflow-based, seamless data flow without system discontinuity. This should then make information accessible at all times and everywhere, with a uniform and consolidated database.

Challenges

What challenges are PE market participants currently facing? In the AssetMetrix network, as well as in an LP survey conducted in 2022 in cooperation with Brackendale Consulting, the following questions were raised in particular:

  • How can we capture, process, aggregate and exchange ever-increasing amounts of data more efficiently?
  • How can we quickly adapt new technologies without our own innovation-oriented technical department?
  • How can we ensure that we remain compliant with evolving regulatory requirements (e.g. ESG)?
  • How can we communicate and share information with our LPs more quickly, efficiently and securely?
  • How can we set up our reporting more efficiently, adapt it to the needs of our stakeholders and make it available at any time?
  • In order to close the large technical gap that exists in PE, time and resources must be used that are not available to the required extent amongst the majority of market participants. GPs and LPs that cannot devote substantial internal resources to this may use external solutions. On the one hand, individual applications can be licensed from software providers, but on the other hand, technology partnerships can also be established.

    But what can you expect from such a long-term technology partnership? At AssetMetrix, we understand this to mean:

  • A technology suite that is constantly adapted to global technological advances and innovations – including productivity and capacity gains through AI
  • Managing infrastructure and security in state-of-the-art data centres and in the cloud
  • Tailoring by design – easily customisable technology stack, virtually as flexible as in-house development, including co-development opportunities for new functionality
  • An ever-expanding range of modules, features and functions, directly influenced by client needs
  • Access to a talented, motivated technology team, mature agile development processes and quality standards

Whether one decides to build up competences in one’s own company, to license software or to enter into a more in-depth partnership naturally also depends on the areas one wants to prioritise for digitalisation.

Opportunities – the most promising areas of application

Among the most requested technologies in PE are those that enable manual tasks to be streamlined, automated and made more secure.

Data capture and processing:

Data collection is one of the biggest challenges in private markets. Data is generally delivered from different sources, sometimes only in PDF format, mostly without applying industry standards such as ILPA, in different languages and currencies and not always in the necessary time frame. Data extraction can be simplified by technology: Where there used to be manual input, it is now possible to use machine learning to automatically transform unstructured data buried in text, tables or figures in documents such as financial statements or legal and commercial contracts into records that can be processed and read by a machine.

In recent years, many GPs have moved to purchase technology packages that perform specific functions optimally but now represent silos of disconnected data. Likewise, GPs and LPs are faced with the demand for the “single source of truth”, working with a variety of providers across their portfolio and lacking a consolidated and integrated database. In both cases, the difficulty lies in combining data and producing consistent reports.

Implementing a technical platform that consolidates and aggregates all data can create the solution for such a single source of truth. Once the single source of truth is obtained, data can be profitably leveraged. Instead of internal teams dealing with the aggregation and validation of data, they can take care of analytics and use their insights to make the right investment decisions in the future.

Analytics

In terms of gaining additional insights into one’s own portfolio, analytical models based on the consolidated data can provide support. Areas of application for this can be found, for example, in:

  • forecasting future portfolio cash flows and, related to this, supporting liquidity planning,
  • allocation planning to determine the optimal amount and type of new investments and reinvestments,
  • performance comparison,
  • the assessment of risk (value-at-risk) and diversification potential for the own portfolio.

The main challenge with respect to portfolio analytics is sufficient data availability regarding one’s own portfolio. Since this is more difficult in illiquid market segments, it is advisable to build on robust procedures that can deal with the limited data situation in the PE area. Supplementing the models with sensible expert-based parameterisations can in turn reduce data requirements.

AssetMetrix sees great potential particularly in interactivity in the area of analytics. In the future, customers should not only receive data, but also interact with it in various ways via portal applications. Thus, it will not only be possible to work with the filtering of existing, pre-calculated data and with already existing analyses, but also to insert new information into the applications and thus interactively calculate new results depending on the specific issue. As a result, investment activities can be planned more efficiently and dealt with more proactively overall.

Reporting

Due to increased reporting requirements, the “extra” amount of data must be analysed, condensed and presented in a meaningful way. Furthermore, the resulting output must be validated before it can be distributed to internal and external stakeholders. Consistency and accuracy are the most important characteristics of a report here. This places high demands on the production process, which can hardly be represented with a pure Excel setup.

In addition, the timeliness of a report is gaining importance. The age when investors had to wait 60 days or more for a classic quarterly report is fading. If the report is also required in several languages, the classic portfolio controllers often reach the limits of what is affordable for GPs. This is where a well-defined production setup with a high technology content for the extraction, transformation, storage and finally the selection of the right data can help.

Over the last few years, AssetMetrix has built up a correspondingly flexible production line for the creation of reports. This makes it possible to produce customised reports in the shortest possible time, in the desired language and in a customer-specific design.

Additionally, clients have the possibility to analyse their data in more detail via web-based reporting and to gain interactive insights through visualisations. The portals reflect the latest cash flows and transactions in the portfolio in quasi-real time.

ESG

Although ESG and PE can generally be considered compatible, there are some challenges in integrating ESG into one’s own processes and systems. The main ones are data collection, data quality, standardisation and continuous compliance with regulatory requirements. With an ever-increasing volume of ESG requests, ways must be found to simplify the exchange of templates and data while generating increased transparency.

By using modern portal technology, the following tasks can be simplified:

  • Collecting ESG data automatically via integrated workflows
  • Designing user-friendly input processes in the web portal
  • Tracking ESG metrics and data centrally across the entire (aggregated) portfolio on one platform
  • Creating integrated or stand-alone ESG reports
  • Continuously complying with international frameworks and regulatory requirements
  • Enabling informed decision-making through portfolio look-through and other ESG analytics

Communication:

Whereas e-mails were the communication standard in the past, today more transparency, efficiency, security and continuous availability of information is required. This can be mapped very well through investor portals. In addition to capital account statements, capital calls and distributions, workflows can be used to ensure process security and, for instance, to support the investor onboarding process.

Conclusion

Some market participants are already on their way into a new era by developing their own applications or using external solutions. In our opinion, the biggest challenge in relation to technology currently lies in the lack of standards for data exchange and data harmonisation. However, it is the noticeable push in the area of ESG that will lead to an acceleration of technology adoption. As a technology company that originated from a PE fund of funds, we at AssetMetrix believe that the use of technology will make the industry as a whole safer, more efficient and more profitable.

If you are in need of accelerating your digital transformation in private markets, contact our team: Request a meeting!