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Preqin Quarterly Update: Private Equity Q2 2022
 
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insights+ | preqin quarterly update

Private Equity Q2 2022

July 12, 2022

Summary

Private equity is set to experience a stern test over the coming quarters as financial market conditions deteriorate on higher interest rates and waning risk appetite. In this report we touch on some of the key reasons why the outperformance of private, compared to public, markets may come under pressure in the medium term, even if near-term performance remains more resilient.

Cameron Joyce, CFA

SVP, Deputy Head of Research Insights

Signs of public market sell-off weighing on PE activity

Risk assets are having a rough ride in 2022. The outbreak of war in Ukraine has exacerbated existing inflationary concerns and prompted risk-off sentiment across global financial markets. At the same time, higher interest rate expectations have crystalized into higher long-term bond yields as the Federal Reserve has taken aggressive action to rein in excess liquidity. The benchmark US 10-year yield has broken out above 3% on two occasions this year but has since settled for now at 2.9%. Oxford Economics expects the US 10-year bond yield to climb to 3.9% by Q1 2023.

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Alter domus

Step by step: driving better decisions through data

Tim Toska, Global Head of Private Equity, Alter Domus

Efficient and accurate data gathering and communication are must-haves in private equity. The next step is harnessing technology tools to make better investment decisions

Why should GPs invest more in their technology platforms?
We have seen a shift in the ultimate benefit of technology adoption. While it was once seen as an investment to improve efficiency, over the last two years it has instead become a catalyst for really meaningful discussions about technology and data, and the ways in which this technology adoption can help generate insights for better decision-making. This means new possibilities now crop up, such as how can technology assist in sourcing the next deal? Or how can it help determine when the market dynamics are appropriate for recapping a deal or pursuing exit possibilities?

What data challenges are GPs and LPs facing, and what are the solutions?
First and foremost, to make proper decisions, you have to trust the data. It may seem obvious, but when aggregating data from various data sources, there needs to be a built-in mechanism of reconciliation and integrity checking to ensure the single source of truth. Due to the disparate sources of data, the main challenge for GPs and LPs is often knowing where that single source came from. We have found that the global pandemic put more pressure on firms to start their data journey as reporting demands increased and staff began working from home and, in some cases, across geographies.

What is the first step toward harnessing the power of data?
People tend to understand that technology will be a benefit, but they may not fully understand how to get there. The key is assessing the need and ensuring organizational commitment to the transformational journey. It may appear easy to see the finish line, especially with the adoption of technologies such as application programming interfaces (APIs), machine learning, and artificial intelligence (AI), but how do we get there? It all begins with the data. These technologies are great for taking in raw data from across various sources within an organization. On paper, it’s a remedial, ‘boring’ first step, but it's a critical one.

What’s a realistic implementation timeframe?
Of course, the timeframe will always depend on the depth and breadth of the specific implementation. This process is a journey for an organization, so it is important to have a plan and to begin by implementing short-term solutions that will allow for long-term development. A firm like Alter Domus can assist with data management, workflows, and processes due to the nature of our involvement. This stems from our service offering. The process begins at six months and should be pushed within 12-18 months although for a high-growth firm it may take longer. Either way, it’s important for new managers to have the right focus on data technology from day one. Ultimately, there is no end date to technology implementation; it’s a critical area that requires continuous maintenance and development.

What lessons can PE managers learn from other areas?
The main ones are the power of data, getting it from different places, and aggregating information to perform meaningful analyses. Our IGRES platform in real estate is a great example of this. We created a solution that integrates all accounting and reporting – from fund administration to local property companies and real estate debt companies – into a reporting environment that provides a single source of truth. Private equity is also getting more complicated, with funds opening in multiple geographies right off the bat, and the existence of grey areas between and within asset classes. And it’s happening quicker than ever. Now, the goal for most PE managers is to have a single digitized version of the truth on one customizable dashboard, and to use that to make better, more informed decisions.

Alter Domus

Tim Toska is the Global Head of Private Equity at Alter Domus. With more than 3,600 employees across 36 offices, and over $1.6tn in global AuA, Alter Domus is a leading provider of integrated solutions for the alternative investment industry and is dedicated to serving private equity, real assets, and debt capital markets.

We'll be taking a break from publishing our Preqin Quarterly Updates in Q3 2022, but you'll be able to read our full analysis of developments and opportunities in each asset class up to the third quarter in our 2022 Global Annual Reports. Look out for them in December 2022.

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