Private equity: managing the big data challenge

6 April 2020
Scott Kraemer, Managing Director, Vistra North America, examines how demands for data and reporting requirements are driving the development of tech in private equity

If the figures are anything to go by, the world is creating data at a staggering pace. It’s predicted that, this year, there will be a total of around 40 trillion gigabytes of data in existence – that’s 40 zettabytes for the more tech-minded. Considering there were only 1.2 zettabytes in 2010, the explosion in data has been remarkable.

To a degree, however, it isn’t all that surprising – a boom in people using the internet alongside a decade of technological advances mean more uploads and downloads at ever-increasing speeds. And hence, more data.

The reality is that data pervades every aspect of our lives, and businesses – especially tech giants such as Amazon, Facebook and Google – rely heavily on it to drive the bottom line. But just how does data play out in the world of private equity (PE)?

As our recent research study ‘Private Equity: Where Challenges Meet Opportunities’ showed, demand for information flows was seen as the biggest market trend influencing or changing investor behaviour – identified by 71% of respondents. Investors and managers require an increasingly complex amount of information, delivered faster and in a way that suits them best.

Unlike much of the business world, however, PE has been slow to move towards technological solutions for data management – often relying on legacy systems and software such as Excel. As a result, consistency of data was named by 72% of respondents as a key challenge facing the PE market from a tech perspective in the last two years.

What’s more, having the systems to manage the data was seen as the largest ‘pain point’ of data integration in PE, by 61% of respondents. So, while information and data are playing an increasingly pivotal role, the systems aren't necessarily delivering exactly what is required. But that is changing.


The size of the problem

It’s worth breaking down the types of information and data that are the main focus in PE. For the most part it splits into two discrete areas: investment data, such as portfolio performance and fund analysis, and that required for transparency; and reporting data, such as KYC information, for regulatory and legislative purposes.

In Vistra’s experience, from a fund administration perspective, requests for data and information from our prospects and our existing client base have increased ten-fold in the last three or four years. And the most significant shift has been towards managers and investors wanting data presented exactly as they need it.

Whereas many managers used to have people collating and analysing data, a large number now want to hand the transaction, portfolio and accounting data over, and have it delivered back in consumable, useable and insightful ways, and delivered to them quickly. While some businesses are sizeable enough to build and use their own analytics tools and software, that’s typically not the case for the small-to-mid-size managers who, in our experience are looking to outsource in order to keep up to speed.

The regulatory burden presents another challenge. Take KYC on investors and FATCA reporting, as an example. FATCA reporting depends on being given a lot of information about the investors – making sure that who they are, what they do, where they’re investing and so on is known. And most of that happens at the front end. The challenge is the information available in almost all circumstances is non-digitalised – it’s just documents all over the place.

Getting the information on those documents into any application in a consistent and standard way is difficult and time-consuming. And while there are automation tools and applications that can assist, there are no guarantees they will do everything that is required – such as being able to flow that information through the accounting side of the equation.

So, while from a technological perspective, the investment and reporting requirements present the same challenges – inputting everything as efficiently as possible, so that the outputs are exactly what are required – operationally they are quite different.


Shifting sands

Yet this is only part of the picture. It is easy to look at the current landscape and identify the type of technology and solutions that are required. But as anyone in PE knows, that landscape is constantly shifting. Investors want and need to have their data served up in new and different ways, and new regulation is going to require more reporting. So how do you avoid investing in systems and software that are in danger of potentially not being fit for purpose?

Firstly, you have to be tech-savvy and build in a scalable way – one that allows you to bolt on. Then, for want of a better word, you have to be ‘psychic’ – to have foresight while having your finger on the pulse of the industry.

You need to be process-oriented, so when the changes in data demands come to fruition, you know that the people collecting the data need X, the people developing the capture of the data need Y, and the reporting people need Z. And that’s what needs to be built in at the beginning.

Imagine if, for example, economic substance regulations are passed in Singapore and they impact funds that are established in the Cayman Islands. You have to take a piece of information and do a whole range of things with it – find it in KYC, load it on to the application/database suite, create reports for it and then make it readily – and globally – accessible. This is why foresight is required.

All of this is also driving the way in which the data is processed and subsequently accessed – with a move away from manual systems, towards a more dashboard-based system.

In our experience, all the above is creating a divide in the route that managers are taking. The big firms may well be able to afford the significant costs of building, running and keeping a system updated. Others are either opting to outsource, or are being driven to do so, because the rate of change is unsustainable and they want to focus on investing rather than spending unnecessary time on ‘low value’ work.

This is why we have developed our VFunds platform, which is designed to service our clients in a tailored yet cost-effective manner. It enables fund managers to run a report, review the data in a dashboard and cut it as needed for the different recipients, be that internal staff, investors, or regulators. What’s more, that information is accessible directly by investors - in cutting down on the back and forth and minimising questions received, because the information is readily available.

There is constant talk within the funds sector in general about the need for standardised systems to manage data, but needs are so diverse – and there are so many competing forces – that this is not likely to happen for a long time, if ever. With more data and more reporting inevitable, the most effective choice is to find a tailored solution that delivers on your discrete requirements.

Where standardisation can be found is for asset managers and investors to use a system across PE, real estate, debt and hedge funds, so that there is a consistent experience from a single provider. In an industry where increasing complexity is a given, finding simplicity in data and information management could be a route to future success.


The full report Private Equity: Where Challenges Meet Opportunities can be viewed here