How technology is transforming fundraising and investor servicing

Long-term trend: The demand for data accessibility

Historically, investors have (reluctantly) tolerated lengthy wait times after requesting data from GPs, mainly due to private equity’s typical outperformance of other asset classes. However, the market turbulence of the past 18 months has challenged the status quo. Today’s LPs are far less tolerant of time lags when they request data, driven by the current climate where international instabilities and sudden regulatory changes can significantly impact decision-making (a perfect example is China’s recent crackdown on for-profit edtech).

The inability to access data in real time is hugely problematic for LPs. All over the world, private equity investors are demanding detailed, ad-hoc reporting – not just at the fund and portfolio levels, but even drilled down to the asset level. They also expect to receive this data quickly; quarterly updates are now inadequate for timely decision-making. In current conditions, LPs have to be agile – they need a clear, accurate understanding of their current exposure so they can adapt their portfolio management and allocation strategy accordingly.

Covid-19 has accelerated digital transformation

Aside from Zoom, much of the private markets’ adoption of technology has been sluggish – but the pandemic has thrown the long-standing inefficiencies in our industry’s infrastructure into sharp relief. Technology on the brink of being dated became antiquated, seemingly overnight; Zoom’s lightning-fast journey from anonymity to ubiquity is an obvious example of legacy software being relegated in favour of better-designed, intuitive and benefit-oriented platforms.

These factors have triggered major disruption in the areas of fundraising and investor servicing, prompting both GPs and LPs to re-evaluate information flow throughout the fund lifecycle. Though these are seismic changes, many industry veterans agree that this is a good thing for top-tier firms – it’s a case of necessity being the mother of invention. After all, Covid-19 forced firms to adopt virtual fundraising for most of 2020 – an unprecedented shift that completely changed the game.

As Jessie Juan, Partner and Co-Founder at Quantium, explains: ‘Technology providers have a responsibility to shape the future of the industry, helping practitioners look beyond best practice, to next practice.’ There is a collective mindset shift in the industry – instead of settling for ordinary vendors, firms are seeking partners who can add more value through advice and recommendations based on deep industry expertise.

Technology providers have a responsibility to shape the future of the industry, helping practitioners look beyond best practice, to next practice.

Recent trends in private equity technology adoption

There are three key trends we are seeing amongst PE firms as they invest in technology for their businesses.

1. Moving from data storage to data engines

Digital transformation has created an expectation of instant information access. Systems that were previously adequate for quarterly reporting are completely unsuitable in the current business environment where real-time data analysis is essential.

Firms are beginning to accept the futility of the sunk cost fallacy and abandon legacy systems that are no longer fit-for-purpose. Most legacy software (as well as modern solutions that are not PE-specialized) provide basic data storage functionality, with a focus on workflow control as opposed to deriving insights. The lack of output functionality and interactive features, like real-time dashboards, often doom these systems to poor adoption, and ultimately, unsuccessful implementation.

Instead, private markets leaders are seeking out powerful PE-specialized platforms purpose-built to handle granular data, making it easy and convenient for LPs to conduct the complex performance analysis they need in order to make investment decisions. This level of detail is important for accuracy, especially when slicing and dicing fund performance analysis – the more granular the data, the better the analytical capabilities. PE firms are sitting on a goldmine of historical fund and portfolio performance data. While legacy “data storage” systems store this information, newer “data engines” enable GPs and LPs to analyse performance in many different ways – not just by industry and sector, but also by funding rounds, investment year, and even their own custom categories. like comparing the performance of sole-ownership vs. co-founder portfolio companies.

2. Shifting to service-based models to reduce implementation risk

As we emerge on the other side of the pandemic, there is a real opportunity for innovative SaaS solutions to step up their offerings and address long-standing industry inefficiencies. Recent spending trends are encouraging; private markets companies are increasing their technology investment budgets, in a bid to drive top-line growth by reducing operational costs and increasing efficiency.

‘We’re starting to see more investment into technology – especially in data and advanced analytics – and a shift from CapEx to OpEx,’ says Sen Ganesh, Partner at Bain & Company. ‘Firms are increasingly favouring SaaS-based models over lump sum investment to allow for flexibility in scaling up (or down).’

We’re starting to see more investment into technology – especially in data and advanced analytics – and a shift from CapEx to OpEx, Firms are increasingly favouring SaaS-based models over lump sum investment to allow for flexibility in scaling up (or down).

This puts the onus on tech innovators to design user-centric, ‘sticky’ solutions. Barriers that previously made it difficult for firms to switch providers, such as hefty upfront payments and lengthy customization times – will be far less challenging to overcome.

3. Looking beyond process management – focus on scalability and extendibility

In the asset management industry, the technology procurement process is traditionally driven by IT, who (typically) have limited understanding of business and LP needs – they evaluate options from a process management perspective. As the business scales and its data grows more complex, each department begins procuring its own solutions in siloes. Different systems are used for portfolio management, fund accounting, and investor servicing. None of the data is linked, creating countless inefficiencies and duplication of manual work for the purposes of cross-departmental information sharing.

PE firms are revamping their procurement systems with scalability and extendibility in mind. The selection process is more often being handled by a visionary leader like a COO or CFO; someone with a bird’s eye view of the business and a clear understanding of 1) how information should flow through the private equity ecosystem, and 2) how process flow should supplement this. They focus on questions such as:

  • Will the information flow seamlessly from the deal/portfolio team, to finance/IR, and ultimately to LPs?
  • Can the system handle aggregation of multi-currency cross-fund calculations?
  • Can portfolio level data flow through to the LP level to enable LP position analysis?

These leaders are looking for solutions that will organize their data efficiently for their back, middle and front office teams, breaking down internal data siloes so they can collaborate more effectively.

Firms are also looking for tech that is designed for the users it is ultimately serving – LPs. Many LPs agree that investor servicing is an increasingly important influencing factor in fund manager selection; investor-centric platforms are likely to give GPs a competitive advantage by demonstrating the strength of their operations in the long-run.

A bright future ahead

This decade marks the beginning of the biggest digital disruption the private markets have seen in years. Industry appetite for technology investment is strong, with encouraging spend trends indicating high intent to implement digital solutions.

However, spending more on technology addresses only one side of a multi-faceted problem. The main challenge is selecting the right platform – ideally one created by experts with an in-depth understanding of the private equity ecosystem – which makes the subsequent hurdles of adoption and implementation easy to achieve.

Luckily, there is a path forward. High-calibre tech vendors are eager to smooth the way for transformative change. It will be exciting to watch how the private markets’ value creation landscape evolves over the next few years, and even more exciting to see how practitioners and providers will adapt with it.

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