In our recent research study, ‘Private Equity: Where Challenges Meet Opportunities’, technology and data both featured heavily as issues of importance to GPs, LPs and the broader private equity (PE) industry. Based on the responses to the study, we have identified four key trends that really stand out in the current landscape.
1. There is a disconnect between the potential for technology in PE and how it is currently being used
Our study revealed a strong consensus that technology could have a significant role to play in the future of PE, with 85% of respondents agreeing that it could be a major enabler of change. Added to that, 81% agreed that new technology, such as blockchain, will have a massive impact on the industry in the future.
While this paints a positive picture, it seems somewhat out of sync with our experience of how technology is actually being used in PE. Throughout the industry, Excel is still widely used and practitioners aren’t getting the most out of the data that is available. The adoption of technology is also hindered by a preponderance of legacy systems.
There seem to be three main options when it comes to implementing technology. Businesses can either: build their own systems; acquire a tech company; or outsource to a third-party provider in order to meet their requirements. Larger firms perhaps have more freedom to choose, purely because they have the capital available to decide the most effective option.
Small and mid-size managers arguably don't have the luxury of building or buying, so ensuring they have the right service provider is absolutely key to their success. And that means partnering with a firm that has invested in the tech and the people that will enable them to compete in the marketplace.
It’s also worth noting that the disconnect also comes from the distinct lack of a standardised system. While it would make sense for everyone to be on a standard platform, there appears to be a reluctance for anyone to go to the forefront and make this happen.
2. Cybersecurity is a present and ongoing threat
According to our study, cybersecurity is viewed as not only the largest threat to the industry right now, but will continue to be so over the next three-to-five years. This comes as no surprise, because it is a global issue that extends well beyond PE and the broader finance industry. Indeed, it is possible that cybersecurity may remain at the top of the agenda for even longer, and with good reason.
Picture a scenario where a fund manager is a hacking victim and investors receive emails asking them to send a capital call to a different account. The potential financial and reputational damage of such an event could be catastrophic.
As such, fund managers are extremely keen to secure their data – either by implementing their own systems or using a third-party provider that is constantly undertaking penetration testing and ensuring firewalls are in place so that client data doesn't fall into the wrong hands.
As technology continues to evolve, so do the cybersecurity challenges, with new and different risks emerging all the time. Keeping on top of these is essential, whether in-house or by partnering with a third-party provider.
3. Data is King – but maximising it is a major challenge
Data is the gold standard in private equity right now. To see its broader value, you only need to look at some of the most valuable companies in the world, such as Google and Facebook, who hold massive amounts of data and use it in a way that turns a profit. Likewise, LPs and GPs want increasing amounts of data – they want the ability to dissect it, to report on it, slice it every which way, and be able to give their own returns and reports to underlying investors and regulators.
With everyone wanting different forms of data, the lack of standardised systems may be problematic. A solution, however, is being found in a shift towards platforms and dashboards that enable easy access, in a secure manner, to the data required.
At Vistra, we developed the VFunds platform to address this very issue. By holding data at the most granular level, fund managers can log in, run a report, review the data in a dashboard and slice and dice it as needed for the different recipients, be that investors or regulators. What’s more, that information is also made available to investors in order to cut down on the back and forth and to minimise questions received, because the information is readily available.
With the amount of data expected to increase in the years ahead, we anticipate a growth in the demand for this particular type of platform.
4. Outsourcing technology may become mandated
While we have outlined the options available to managers when it comes to technology, it’s possible that some may be faced with no option at all, with investors beginning to mandate that a variety of functions be outsourced as a matter of course.
Our research study revealed that 84% of LPs want their GPs to outsource certain functions, with 67% saying they are keen to influence the choice of provider. The study also showed that when it comes to finding solutions that can be implemented to help with better data and technology management, 55% responded ‘outsourcing to a third-party expert/single service provider’.
Putting these two statistics together and setting them against the backdrop of data and cybersecurity issues, we expect some investors will demand that managers outsource technology in the future. Indeed, this is something that is already happening, and will likely become more commonplace.
The full report, ‘Private Equity: Where Challenges Meet Opportunities’, can be viewed here.
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