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Private equity – a long, winding digital journey

We have long spoken about private equity regarding their lack of automation and steadfast refusal to digitalise core operations - at least relative to other asset classes such as hedge funds and long-only managers – but it seems the private equity industry is finally starting to play catch-up.
Sumit Mahajan, CAIA, FRM
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We have long spoken about private equity regarding their lack of automation and steadfast refusal to digitalise core operations - at least relative to other asset classes such as hedge funds and long-only managers – but it seems the private equity industry is finally starting to play catch-up.

Until recently, a large proportion of private equity managers were heavily reliant on analogue processes – a deficiency which ultimately saddled them with unnecessary costs and risks. Moreover, this reliance on legacy systems also undermined the client experience at a time when competition for investor capital was intensifying. However, private equity’s uncertainty to all things digital is starting to recede.

According to EY, 39% of private equity managers running between $2.5 billion and $15 billion said enhancing their back-office processes and technology was their top strategic priority.  Meanwhile, 23% of $15 billion plus managers said the same about transforming their front office technology.

Most significantly, 56% of managers are already using or intend to deploy next generation data and analytics tools, while half use or expect to leverage artificial intelligence (AI) solutions.

But what prompted this U-turn?

This transformation is being driven by several factors. The pandemic is the most obvious as it forced firms to work remotely and embrace new technologies. Beyond that, the industry is becoming increasingly complicated. Firstly, there is an unprecedented amount of data available to every manager, and this simply cannot be digested manually if firms are to make use of it either in their investments or operations.  As such, the abundance of data is forcing firms to invest more into their technology.

In addition, private equity managers need to supply more information to clients and regulators than ever before. While the EU is pushing ahead with its Sustainable Finance Disclosure Regulation provisions, the US Securities and Exchange Commission is insisting managers publish information about fees and portfolio expenses. There is pressure from all sides.

Investors are also becoming more demanding, asking that detailed reports be provided to them in digital form as opposed to physical copy. Meeting these new requirements is infinitely more straightforward for managers if the report generation process is automated.

One of the biggest benefits of automation is that it can help managers generate efficiencies and with it cost optimisation and economies of scale. This is vitally important given that overheads are dramatically rising throughout the industry.

Accordingly, EY found 63% of $15 billion plus managers were deploying new technology to offset margin erosion. A number of firms highlight that their investments in technology have yielded positive results, by not just improving their overall capabilities but by reducing employees’ time spent on administrative activities such as data aggregation. By freeing up resources, staff can then dedicate more hours to working on tasks which actually add to the bottom line.

Understanding the value of tangible D&I strategies and supporting their own ESG narratives, PE firms understand the value fluid, accessible and attributable data can bring to their firm in terms of client selection and retention. This additional focus and conversation has also increased the real value of digitisation to the sector, as demand for a implementable and sustainable D&I and ESG policy grows. It is now no longer okay to talk the talk, PE firms must be able to show that they are evolving and part of the wider people and planet conversation. Digitisation allows firms to do that.

Having been behind the curve on technology adoption and digitalisation, private equity is finally racing ahead. Conscious that investing into automation can help the industry meet its newfound reporting obligations and reduce complexity, managers are now embarking on a digital transformation journey.

Sources:

EY 2022 Global Private Equity Survey

HIS Market (June 8, 2021)Tech adoption in private equity is accelerating, but why?

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