How to get Private Equity “out of the dark ages”

Alternative Investments are on a tear, and no asset class has seen more growth than Private Equity. According to eVestment, Assets under Administration (AUA) grew 44% from 2015 to 2016.

This influx of capital has caused major ripple effects across the entire private equity landscape, with fund managers competing intensely to attract investor capital.

This competition has reinforced the importance of the overall experience private equity managers provide to their investors and as a result, managers have increasingly been looking to their fund administrators for solutions.

Technology is widely seen as the solution to many of the challenges facing both private equity managers and fund administrators. Yet despite this consensus, “private equity is in the dark ages when it comes to technology” as Allison Piet, director of Alternative Investments Accounting & Reporting with MetLife eloquently puts it.

Private equity fund managers and fund administrators alike are finding themselves at a crossroads on two key issues:

  1. Delivering on investor demands for greater transparency and a more modern digital experience
  2. Handling operational burden of labor-intensive & margin-constraining processes that are insufficient to meet growing regulatory requirements

A study called “The Promise of Tomorrow: Private Equity and Technology” brings important context to these two issues:

  1. Delivering on Investor demands for a more transparent and modern digital experience

One of the greatest obstacles to solving this challenge is the numerous systems that fund administrators and fund managers use across areas like accounting, reporting, and document storage.

This multi-system approach adds a great level of difficulty to the process of collecting and preparing data required to provide investors with transparency. Further, maintaining multiple systems often proves to be arduous and time-consuming.

The use of Excel also has other potential negative ramifications according to Tony Chung, global head of product management and strategy for private equity at FIS. Chung makes the case that investors that are performing due diligence on a given fund manager are increasingly turning away from fund managers that rely mostly on Excel for data and processes.

Chung says that investors look to factors like the use of a known & established technology platform as a criterion for the accuracy of the data that the fund manager and fund administrator are obligated to provide for transparency purposes.

But beyond their requirements for additional transparency, investors are demanding a digital experience for their alternative investments that is akin to the experience they enjoy with their brokerage and personal banking accounts.

This demand for a more modern experience has placed tremendous pressure on fund administrators in particular, as their fund manager clients increasingly look to their administrators to meet this need. Fund managers are sending a loud message by walking away from administrators that can’t help. In fact, according to a Preqin study, 28% of fund managers fired their fund administrator in the past 12 months.

This helps to explain why, according to the FIS study, 26% of respondents felt “threatened” by technology. That said, those that are leveraging the power of technology to improve their offering are realizing that it can become a competitive advantage, as evidenced by the 74% of respondents that affirmed this in the study.

There is a great quote from the study that brings this to life: “The private equity industry’s efforts to reinvent its relationship with technology also reflect recognition of the critical importance of technology to winning and retaining customers and to penetrating new markets.”

  1. Handling operational burden of labor-intensive & margin-constraining processes that are insufficient to meet growing regulatory requirements

Private equity and the Alternative Investment industry as a whole have been going through a metamorphosis over the past few years in the area of operations, driven in large part by the imposition of ever-increasing regulatory requirements. Compliance is the great equalizer, affecting all stakeholders in the industry from the fund administrator down to the investor.

These requirements become a business-breaking burden when operational efficiency is dictated primarily by the number of people that a company has available to help tackle them. The Alternative Investment industry is notorious for how heavily it relies on people to handle manual and repetitive tasks that should be automated. These are things like document preparation and distribution, tracking and receiving needed approvals, sending emails for notifications, and more.

These manual tasks are exponentially more troublesome when legal & regulatory requirements come into play as most fund administrators have to add 1 full-time employee for every 3 or 4 new clients that they win.

This results in a vicious cycle for fund administrators as they far too often expand their budgets on additional staff instead of investing in technology that could solve their root problems.

The lagging emergence of the Cloud within the Alternative Investments industry is also a factor in helping stunt operational efficiency. Key stakeholders like fund administrators have historically shielded themselves from the use of the Cloud for outdated and inaccurate concerns about security.

This has helped cause IT staff to proliferate, as fund administrators attempt to become technology companies. Unfortunately, these same fund administrators quickly realize the difficulties of software development, maintenance, and new feature development. The more staff, time and attention dedicated by the fund administrator to technology issues, the more it pulls them away from critical areas like client service and accounting.

It’s important to note that banks went through a similar journey about 5 years ago, and many were pushed to overcome these fears by the emergence of disruptive FinTech startups that proved them wrong about the Cloud.

The FIS study shows this shift in thinking about the Cloud happening within private equity, as over half the respondents listed data privacy and cyber-security as the primary reasons that they sought out cloud-based solutions over self-hosting. A surprising 78% of respondents stated that they are exploring cloud solutions today.

Technology as the way out of the dark ages for Private Equity

Technology provides the clearest path to help private equity get out of the ‘dark ages.’ This is the one solution that will help all key stakeholders improve the overall offering to investors without compromising their ability to build profitable businesses.

This quote from the FIS study encapsulates it best:

“Firms that embrace this world of innovative technologies are likely to be the ones that win out in the marketplace.”

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By | 2017-06-09T16:44:17+00:00 June 9th, 2017|Categories: Industry News|

About the Author:

Chris Andraca is the Head of Operations at BaseVenture, with responsibility over Sales, Marketing and Client Services. BaseVenture is an award-winning software company that is helping the alternative investment industry simplify & modernize how private funds are managed and administered. Prior to BaseVenture, Chris established and led the Mobile Account Management team at mFoundry, which grew to become the leading technology provider in the mobile banking & payments space. Chris continued in that capacity when mFoundry was acquired by FIS in 2013.