How has the adoption of technology within private equity (PE) evolved?
Despite the technology sector being a crucial area of PE investment, PE has traditionally been quite a low-tech industry. There are many reasons for this. PE organizations such as pure asset managers are home to smaller teams, which lack technology teams to support them. The amount of data being managed in the PE industry is more ‘small data’ than ‘big data,’ especially compared to the liquid assets industry. PE has therefore historically utilized low-tech products such as Excel to manage data.
There are, of course, exceptions. Several players in the market have relational databases in place, and advanced managers have even developed proprietary applications that go well beyond data management in Excel or relational databases. Others have chosen to license applications from software vendors in the industry. So there is quite a range in terms of technology adoption across PE.
What is driving managers to adopt technology?
The adoption of technology in PE has been driven by three factors. First, the success and growth of the PE industry have led to more and larger funds being managed by asset managers. As a result, they are dealing with more clients, service providers, and data, all of which is difficult to manage in a low-tech environment. As more data is gathered and processed and a higher number of reports need to be delivered, the pressure to adopt modern technologies rises.
Secondly, the adoption of technology has been driven by client demand, especially among regulated investors such as pension funds, insurance companies, and other institutional investors. The big players are under stronger regulatory regimes, requiring a wide range of reports and analysis to fulfill their regulatory obligations. Fund managers have been put under increasing pressure to adopt reporting technology to satisfy investor demands.
Finally, the overall advancement of technology obviously plays a major role as well. The spread of digitization has quickly outdated many processes within PE. The exchanging of PDF reports over email now looks archaic when compared to other industries with fully digitized processes and seamless flows of data.
What solutions are investors and fund managers looking for?
What we’re seeing the most demand for now is the base level of technology adoption: a solution that allows fund managers to efficiently and reliably process data in a highly automated manner, producing any firm-specific KPIs, consolidations, or aggregations required. We’re also seeing strong demand in the digital universe. This revolves around real-time reporting channels, digital workflows, and digitizing the exchanging of data and documents based on web and mobile technologies.
The next step in adoption is data-driven insights. Creating harmonized and streamlined data on digital platforms allows you to perform analysis that goes well beyond aggregations of historical data. Fund managers will be able to look into the future with forecast models and risk analysis delivered on a platform. Such models can provide, for example, value-at-risk analysis that is compliant with regulatory requirements in a similar way to how this is done for liquid assets – at the click of a button.
How do fund managers approach becoming more technologically advanced?
Many PE organizations are simply not big enough and don't have the in-house competencies to successfully adopt sophisticated technology. It’s not as if all fund managers have the resources of an investment bank or insurance company to help with technology implementation.
Specialized providers that both understand PE and possess the technological skills are therefore becoming increasingly important in the market. Fund managers are looking for firms that are able to combine knowledge of the requirements of fund managers and private funds with an understanding of how advanced technological offerings can provide value.
Specialized providers reduce the time taken to adopt new technologies; organizations don't have to invest money today and wait two, three, or five years before harvesting the outcome of these systems. Providers also have scale effects and efficiencies that isolated PE organizations may not be able to reproduce.
What’s next for PE and the future of technology in the industry?
We will see progression in machine learning and artificial intelligence (AI) in the coming years; fund managers will increasingly see the benefits that these systems can provide in processing both structured and unstructured data. We’re now seeing cloud technologies conquering financial markets. Previously we saw that issues surrounding data residency and confidentiality slowed this adoption, but this is now changing as the industry’s perception of cloud technologies becomes increasingly positive.
Also, robotic automation in PE processes is becoming more popular. Advances in this space will combine everything that we see on the machine learning and AI front to deliver a next level of efficiency in automation.
Then you have blockchain and distributed ledgers. These are interesting technologies that might find an application in PE, in particular by helping firms to manage all sorts of transactions more efficiently.
Looking ahead, we expect to see technology transform PE at an accelerated pace. The basis for this will be technology-assisted, harmonized data-exchanging that will permit the creation of what I call true “data supply chains.” This involves the seamless integration of specialized, value-adding “component providers” in uninterrupted, readily available data flows, comparable to how supply chains work in manufacturing and elsewhere today. Industry-adopted standards in data exchange and machine learning will address the toughest challenge in this, which is data harmonization. Approaches for data ownership and confidentiality will also need to mature. Progress along these lines will allow novel digital business models to arise and enable digital market places for PE to materialize.
Beyond that, trends already visible today – predominantly in the liquid assets universe – will become more widely adopted in PE. These include data-driven investment decisions, potentially encompassing robotic investment offerings, self-optimizing quantitative models, and machine-reading from paper-like reports, all in addition to innovative cloud technologies that will make functionality more scalable, easy to adopt, and commodity like.
This article is taken from the 2020 Preqin Global Private Equity & Venture Capital Report. For more expert commentary on the private equity & venture capital industry, please visit preqin.com/gper
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