Private capital: two key drivers of change in 2023

Significant modern growth periods have always been marked by an industrial revolution. The first brought us the steam engine, the second electricity, the third internet technology, and finally the fourth, and current, the industrial revolution has brought us digitalization, cloud computing, big data, and analytics.

Just as the industrial revolution marked a significant shift for all industries, private markets are beginning to move from the third to the fourth industrial revolution. The Preqin Special Report: The Future of Alternatives in 2027 demonstrated considerable investor appetite for private capital, forecasting that the private market’s overall assets under management (AUM) will double from $9.3tn in 2021 to $18tn by the end of 2027 (excluding hedge funds).

While this forecast looks positive, today’s challenging macroeconomic and political environment means that private markets are facing another down cycle.

Aiding the private markets this time around, however, is an onslaught of data and technology. According to a recent survey by S&P Global Market Intelligence and Mergermarket, 83% of private equity senior executives reported that big data and data analytics have become increasingly more important in the past two years. The fourth industrial revolution is coming for the private markets, and technology and data will play a key role in supporting the private markets to keep up with the competition and unlock alpha. 

Value creation
In the past couple of years, the private markets have faced an onslaught of global uncertainties, with rising interest rates and soaring inflation being the latest battles. Rising interest rates tend to slow down private market activity, as it increases the cost of capital.

This economic environment means that private equity firms are increasingly focusing on operational improvements and increasingly relying on technology to generate cash flow. In the post-1980s era, private equity focused on leverage and financial engineering to find value, but over time, it’s moved towards operational improvements, with over 50% of private equity firms firmly focused on this as a revenue generator.

Technology’s role in operational improvements for private equity firms and their portfolio companies cannot be overstated. Several leading private equity firms are now employing modern data warehouses and business intelligence tools. These enable a firm’s management to effectively monitor and assess performance across the organization to understand where improvements can be made across the portfolio. Using technology in this way is especially important in a tight macroeconomic environment when value creation becomes trickier.

Technology and data as a differentiator
Adding to this, increased competition for assets is driving firms to reassess their use of data and technology, with both becoming key differentiators for firms in the competitive market.

Technology and increased access to data allow private equity firms to optimize returns, thereby saving money and facilitating faster growth. Technology-enabled portfolio monitoring has been a key priority for private market fund managers, allowing them to either observe or anticipate the effects of market volatility on their illiquid assets through the provision of live data and analytics. This is replacing Excel spreadsheets, which aren’t only outdated and time-consuming, but often incapable of providing crucial insights that only real-time portfolio monitoring can.

Adding to the benefits of portfolio monitoring, access to a greater depth of data has become a key differentiator. S&P’s survey found that a slim majority (53%) of firms are using emerging alternative data to help inform their investment decisions. This was highlighted as the single most important source of data by 37% of respondents, the highest for any specific data source.

However, this type of data is almost exclusively the preserve of the largest PE firms – 91% of those survey respondents who cited alternative data as their single most valuable source had AUM over $26bn. The focus next needs to be on the democratization of this data. 

EY’s recent survey on digital technologies’ impact on asset servicers, found that the top three emerging technologies over the next two-to-fi ve years will be workfl ow automation, data analytics, and cloud computing. This process-led approach underlines the importance of back-office and work-related activities for asset managers, which will speed up processes, reduce errors, and support the industry’s transition from using legacy technology into the modern day.

Democratization of private markets
In the past, private assets have only been accessible to the largest institutional investors due to the nature of the transactions, as private market deals are time-consuming to source and complex to structure. However, this is finally changing, and private markets are opening to retail investors, creating more market liquidity.

This is primarily being driven by non-institutional investors looking for ways to diversify their assets – by educating themselves and embracing a variety of technology platforms, they’re able to operate and have oversight on their own investments. Illiquid assets have always been one of the main blockers for retail investors when investing in alternative asset classes, but this is finally being opened up through the democratization of data.

The UK’s Financial Conduct Authority is creating a Long-Term Asset Fund regime, which will support retail investors investing in long-term, illiquid assets through the introduction of stronger liquidity management and governance features. Similarly, the EU has proposed changes to its European Long-Term Investment Funds (ELTIFs) framework to strengthen investor protection. A lack of data, which has previously been a barrier to private market democratization, is slowly fading through the implementation of technology.

Finally, technology, such as blockchain and tokenization, has revolutionized how individuals and enterprises can access private markets. The latter enables fractional ownership, provides investors with a digital right of ownership over an asset using blockchain, and significantly reduces investors’ costs for having a share in the ownership of an asset. Democratization of the private markets is beneficial for everyone, as it creates more liquidity and transparency, and provides greater access to more investors. 

Charting a new path
Encouraged by technology and the democratization of data, private markets are experiencing their own fourth industrial revolution, which will allow them to resiliently navigate today’s complex macro-economic environment.

Platforms such as Preqin have greatly helped in democratizing access to private data. Private equity firms are increasingly entering the fray and exploring insights from a broader range of data sources and technology, especially when it comes to investment sourcing and portfolio monitoring.

In addition to the provision of alternative data, technology can now make sense of increasingly unstructured data sets, which were previously inaccessible. But this data needs to be made accessible and cheaper. It’s time to further unlock private market data to create more value for investors.

About
Justin Partington is the Group Head of Funds and Asset Managers at IQ-EQ. He has over 20 years of international experience in the alternative fund services sector and is an expert in the operation, delivery, and marketing of fund and investment administration in the alternative assets space.

IQ-EQ is a leading investor services group that employs a global workforce of 4,300+ people located in 24 jurisdictions. It has assets under administration (AUA) exceeding $750bn. IQ-EQ works with 11 of the world’s top 15 private equity firms, and provides a comprehensive range of compliance, administration, asset, and advisory services to asset managers, multinational companies, private clients, and asset owners operating worldwide.