From Quantium’s Co-Founder Sun Suriyapatanapong’s early career at Bain & Co., working with private equity firms, one thing became clear: IT systems and data management are critical topics during investment due diligence and post-deal improvement initiatives. He dedicated significant time to diligencing or mapping IT roadmaps to enhance GPs’ investment operations.
However, once he delved into the inner workings of private market firms, a surprising reality emerged. The operations behind the billions under management are often alarmingly outdated – relying heavily on spreadsheets and third-party outsourcing. A recent survey by EY revealed that only 17% of managers with USD $2.5-$15 billion in AUM consider their technology platforms to be highly automated, with this figure dropping to just 14% for smaller firms.
Imagine this scenario: you ask the CEO of a portfolio company, “How much revenue do your biggest customers generate?” and they respond, “Let me check with PwC.” That would be a red flag. Yet, if you ask a private equity Managing Partner, “Who are your top LPs by commitment, and what are the latest quarterly IRRs?” the response is often, “Let me check with our fund administrator.”
The private markets myth: “Our operations are different”
Private market firms sometimes believe that their operations are too unique to fit within the constraints of conventional systems. But here’s the reality: their core needs mirror typical enterprise requirements.
- Purchasing and Inventory: In the private markets world, this aligns with portfolio monitoring. While typical businesses track inventory levels, private credit managers need to monitor portfolio KPIs and covenants, and PE firms must assess fair market values and maintain efficient data collection workflows.
- CRM and Sales: Just as corporations need to identify their customers and manage overall relationships, private capital firms need clear, comprehensive visibility into their key investors, by relationship and by exposure across all funds – not just data on a fund-by-fund basis.
- Finance and Accounting: Private markets CFOs need financial systems specifically tailored to their unique requirements – systems that provide the flexibility to manage both in-sourced and outsourced administration. They should be able to handle co-investments, waterfalls, effective cash flow planning, and centralize Gross to Net IRR information.
- Reporting and Analytics: Comprehensive and accurate analytics are essential for handling both standard and ad-hoc reporting needs. An investor portal should mirror a client portal, meeting modern expectations for robust security and user-friendly access.
Finding a way forward
The pathway forward depends on where your firm currently stands:
- Starting from scratch: If your firm still heavily relies on spreadsheets, that’s not necessarily bad news. Begin by adopting a scalable platform that centralizes data collection, reporting, and portfolio management. It’s crucial that the finance and accounting component is robust enough for your CFO’s needs (e.g. generating capital notices and calculating waterfalls) while being flexible enough to easily ingest fund administration data if/when you choose to outsource. Partnering with forward-thinking fund administrators that support co-sourcing models and integrate with your IT systems can be highly advantageous.
- With existing systems: If, like the majority of firms, you already have one or multiple systems in place, that’s a solid starting point. It’s important to identify what serves as your central hub. Assess any gaps and streamline integration between investor portals, portfolio monitoring tools, and fund/investor financials. Keep in mind, a CRM or a data warehouse isn’t an ERP – it’s only one part of a larger system. Re-evaluate your current capabilities and don’t hesitate to make changes that ensure the long-term scalability of your operations.
After all, you advise your portfolio companies on “digital transformation” – it’s just as important to put digitization into practice within your own investment operations.