Private equity (PE) companies have been responsible for backing some of the world’s biggest and most successful technology firms.
For several years now, managers have been able to quickly and shrewdly spot businesses that are able to improve people’s lives, save them time, or provide them with opportunities they never previously had because of technological advancements. Managers then tend to invest in technologically advanced firms because they understand the value and importance of technical prowess.
But, while PE companies have been at the forefront of technology when it comes to those they will back, their own operations have been found wanting, especially when it comes to areas like onboarding and adhering to rules about knowing your customer (KYC).
The digital gap
Indeed, a number of PE firms still rely on spreadsheets, word processors and manual disjointed workstreams within their front-back and middle-offices. The upshot is that they’ve faced problems gathering or analysing the data they need in a hurry for reporting or investing, which has created a ‘digital gap’ between what investors expect and what GPs are delivering.
IQ-EQ recently conducted a survey of 30 C-suite professionals, of which two-thirds manage more than $1bn of assets. We found that manual technology was still heavily relied upon by market participants. What’s more, 82% of respondents revealed that they continue to use manual admin tools within their operations.
However, private equity firms are feeling pressured to change. Our survey found that there was a strong interest among managers to adopt a single platform to combine and streamline onboarding processes. In fact, 64% of respondents said they were interested in a platform that can complete onboarding from the beginning of the process right through to digital subscription documents.
This shows that, while investor onboarding and implementation is a clear pressure point in the sector, firms are actively looking to technology to solve those problems.
The crunch of compliance
GPs also recognise the crunch points – and great risk of failure – when it comes to compliance. The results of our survey additionally found that there’s an increased demand among GPs for technology solutions to streamline compliance procedures. Indeed, meeting new regulatory reporting standards is a constantly moving target for private equity firms. While having to navigate an increasingly complex spider web of regulations, fund managers are also faced with increased pressure for transparency – and so many are looking to leverage technology to reduce compliance risks, improve visibility, streamline task flow, and minimise administrative efforts.
It’s important to remember that many managers are also trying hard to get on top of their use of technology. Although our survey showed that a large chunk of the market is reliant on legacy systems and manual technology, it also found, for instance, that 76% of respondents are already using investor portals or data rooms for onboarding, which offer greater security for sharing confidential information and allow full control of the necessary documents for the due diligence process.
With all the relevant documents stored and accessed in one place, fund managers can benefit from improved data transparency, as well as the ability to view benchmarked metrics and evaluate fund performances.
This shift shows that firms are increasingly looking to technology to provide secure transparency and meet industry standards.
Tech as an ever-changing beast
The trouble, however, is that technology is an ever-changing beast which can make it difficult when incorporating new processes into a business.
Technology advancements don’t stand still and neither do regulations. Governments and regulators across the globe are consistently making changes to what it requires from financial participants and so managers need to keep on top of this.
Indeed, while the significant growth of private market investments creates a plethora of fresh opportunities, GPs will need to make sure they have solidly built processes and controls in place, and that their risk and compliance functions are also properly equipped.
Experts expect a particular supervisory focus from regulators on valuations, protections for retail investors and on the risks of greenwashing. EU managers will additionally need to make key decisions about their business models ahead of the execution of AIFMD II, which reduces flexibility for managers and will include leverage limits.
All of this means technology will, without doubt, become a value driver for managers. Our study shows that progress is being made by some GPs in this area, but it also points to the fact that there’s still a lot of work to be done.
But, while that might create challenges and mean resources may need to be diverted to get this right, the evidence shows that it will be time very well spent.
