To help asset managers gain a competitive edge, part one of this two-part article details the current technology and data strategy trends in the private equity industry and the impact on organizational efficiencies via the use of data and technology. Part two of this series covers the common complexities of implementing new technology and mitigating potential challenges.

According to a 2022 S&P Global Market Intelligence survey, 90% of respondents agreed that increased competition for assets is driving their firms to reassess their use of data and technology, with just over a third in strong agreement. While some financial services sectors have been early and consistent in their use of technology, the private equity industry remains widely considered as low-tech. Compared to liquid markets where vast amounts of data are available, in the private equity industry Excel spreadsheets were sufficient to manage data until recently.

Nowadays, investors are demanding automation as well as the implementation of tech-driven central data storage systems from their fund managers to ensure regulatory obligations are met. Along with automation, there is a growing desire for customization in the private markets space to provide a more accessible and detailed experience for limited partners and fund managers. General partners are seeking ways to reduce costs and increase operational efficiency using technology, especially when managing more and larger funds.

Due to these investor demands, an abundance of data must be analyzed, condensed, and presented in a relevant manner as data is required more frequently and deals are becoming increasingly complex, requiring more administration. In comparison to manual Excel setups, these high demands are much easier to meet with the use of robust investor portals with drill down capabilities, relevant detailed reporting, and interactive insights through real-time visualizations.

One of the many ways fund managers leverage data as a vital, differentiating asset is by outsourcing their fund accounting and reporting to a third-party service provider with ready access to top technology. Scalability, by itself, is a major factor in determining what to outsource and to whom. Data and technology should be at the forefront for making these decisions. To do so, it’s imperative to dissect the demands of private equity asset managers and look at the relationship between funds and their service providers. It’s important to explore the various concerns, ideas, and potential approaches that may help to achieve a strategic advantage in a world that revolves around a tech-centric approach.

Private Equity Technology and Data Strategy Trends

What are the data strategies and technological trends in the private equity industry?

Since the pandemic, the use of technology and state of data strategy continues to evolve rapidly in the private equity industry as fund managers seek new ways to drive business and scalability. Fund managers and fund administrators continue to shift from manually maintained Excel sheets to streamlined industry-leading technology platforms. From virtual due diligence and AI-driven tools to identify investment opportunities, technology and data remain at the forefront of the private equity process.

Digitizing has become a hot topic and is a critical first step in its use in emerging technologies. Document digitization seems to offer the promise of a brave new world in terms of transparency and achieving true scale. Below are the major trends in the private funds sector as it relates to data and technological progression:

• Viewing Data as an Asset – Having centralized, simplified, and easily accessible data is an influential asset which can help grow business intelligence and create flexibility to best support business objectives.
• Migration to Cloud-Based Technologies – Cloud-based technologies allow managers and general partners to quickly scale up to meet their business needs by optimizing application capabilities and solutions.
• Moving Beyond the Basics – Utilizing more sophisticated, industry-leading technology applications, fund managers and general partners can avoid much of the process and time commitment of manually maintained Excel spreadsheets.
• Proliferation of AI and Machine Learning – Private equity firms are increasingly using AI and machine learning to gain insight into larger amounts of data, allowing a better way to analyze information and automate tasks.
• Greater Emphasis on Data Governance – Investment managers are bolstering their compliance measures and managing data securely to comply with the rapidly evolving regulatory environment and protect their intellectual property.
• Increased Investment in Data Quality – Organizations recognize data quality’s importance and adopt new approaches and technologies. Increased data quality can contribute to improved decision-making and reduce risks.
• Embrace Analytics for Future Growth – According to an S&P Global Market Intelligence survey, 83% of respondents report that big data and data analytics have become more important over the past two years.

How Technology and Data Affect Firm Efficiencies

What are the benefits of technology and data usage? What efficiencies are created?

Technology has the potential to offer fund managers many solutions, which can result in building a significant advantage in the private market space. Investment managers with agile operations are likely to respond quickly to changing market conditions and seek new ways to drive business and scalability. For organizations to discover opportunities and optimize operational efficiency, they must utilize data as a leading differentiator, especially in firms where the strategy is driven by a large volume of factors such as funds, investors, tax returns, audit, and other regulatory requirements.

The efficiencies below further explain how utilizing the power of data and analytics can boost progress, reduce costs, increase risk management, and free up time for general partners and fund managers to focus on the core.

Data Collection

In private markets, data is generally delivered from multiple sources, which typically do not apply to industry standards such as ILPA and can include various languages and currencies. New technologies, such as the use of cutting-edge APIs, provides a solution to simplify data extraction as it consolidates and aggregates data from one system to another, giving organizations a streamlined, single source of information rather than batch processing. With manual input in the past, it is now possible to use machine learning to automatically transform unstructured data buried in text, tables, or figures in documents like financial statements and contracts into records that can be processed and read by a machine.

Analytical Insights

Analytical models using consolidated data can help a firm gain additional insights into their own portfolio. Using analytics, fund managers can utilize historical data to identify the correlation between investments and returns and help forecast future trends. Predictive analytics can provide insights into portfolio cash flows and support liquidity planning, assist with allocation planning to determine the optimal amount and type of investments, provide performance comparison, and assess risk and diversification potential for the portfolio. As a result, investment activities can be planned more efficiently and handled more proactively.

Reporting via Sophisticated Investor Portals

Due to increased reporting requirements, an abundance of data must be analyzed, condensed, and presented in a relevant manner. More than ever, investors are demanding timely, consistent, and accurate reporting. In comparison to manual Excel setups, these high demands are much easier to meet with the use of investor portals and additional technology. Portals give limited partners the opportunity to review data and reports in more detail and gain interactive insights through real-time visualizations, including drill down capabilities and historical data information.

ESG Analytics Tracking

Environmental, Social, and Governance investing, also known as ESG, refers to the framework an organization uses to measure the sustainability and ethical impact of investments. It is a stakeholder-centric approach used by socially conscious investors. Integrating ESG into current processes and systems can be a challenge, especially as it relates to data collection and quality, standardization, and continuous compliance with regulatory requirements. 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

Efficient Communication

Investor portals provide more transparency, security, and continuous availability of information. In addition to capital account statements, capital calls and distributions, workflows can be utilized to ensure process security and support a more targeted investor experience. Portals allow general partners to seamlessly combine data and produce consistent reports for their limited partners, creating increased communication and information sharing more quickly, efficiently, and securely.

Next, part two will cover the complexities of implementing technology and alleviating challenges.

Citations

S&P Global Market Intelligence. June 8, 2022. ‘Private equity reboots its approach to technology as competition heats up’. https://www.spglobal.com/marketintelligence/en/mi/research-analysis/private-equity-reboots-its-approach-to-technology-as-competiti.html

ULP 17138832 07/18/2023