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Tech adoption in private equity is accelerating—here's why

08 June 2021

Private equity firms have a reputation for being conservative organizations that rely on the quality of their relationships and the expertise of their deal and operating teams to drive returns. But the reality is changing rapidly as these firms begin to recognize the transformative impact that technology is having on the private markets. Today, more than half of private equity firms (56%) now use (or expect to use) next-generation data and analytical tools, and half now use or expect to use artificial intelligence.

And while private equity firms have historically focused on digital transformation initiatives that boost the value of their portfolio companies, they are now increasingly seeking to leverage technology to transform their own operations.

Key drivers of technology adoption

In our view, 2020 was the year that the scales definitively tipped in favor of a technology-driven approach. While the pandemic was indisputably a big part of the story, the following factors were already exerting pressure on the asset class and prompting greater interest in technology solutions:

  • Exponential growth in data volumes: Between 2015 and 2020, the amount of data created globally increased by 281%. By 2024, we will see a further increase of almost 150%.
  • More demanding investor expectations: Limited partners (LPs) are now demanding more of their general partners (GPs). They expect full transparency, institutional-level reporting and risk management, and more granular and contextual market data. ESG metrics, in particular, are adding to the complexity of portfolio monitoring and reporting.
  • Tighter regulatory requirements: Compliance obligations are tightening for the global private equity industry. For instance, in the EU, private equity firms are now subject to its Sustainable Finance Disclosure Regulations, which mandate financial market participants to disclose specific sustainability-related information and how they integrate sustainability risks into their investment decision-making process—all of which require enhanced data-processing capabilities.
  • Increasing market volatility: Financial market volatility spiked in early 2020, with implications that rippled across alternative assets. But although economies are recovering and vaccinations are progressing, volatility—as measured by the CBOE Volatility Index—has remained above the historical levels for the past 10 years.

These drivers have coaxed investment firms to experiment with more tech adoption. The needs have now become immediate, and look set to continue increasing. As for the costs, data from a recent survey of GPs who are using iLEVEL showed most have already achieved positive ROI.

Generating value and ROI from technology

Tech adoption can create value for private equity firms upstream, midstream and downstream. The upstream benefits stem from deal due diligence—helping them identify higher-quality deals—as well as raising capital from LPs. The midstream level enables firms to better monitor their portfolio companies for more efficient operations. Finally, the downstream supports GPs in directly adding value to their portfolio companies.

A recent survey of private equity firms who have invested in the iLEVEL portfolio monitoring platform underscores the positive ROI that these firms are realizing, particularly for the upstream and midstream levels. Among surveyed private equity firms, 43% saw a measurable ROI in portfolio analysis and 53% saw a measurable return in investor servicing capabilities. Firms also reported saving an average of 121.25 hours per person per quarter across four divisions—portfolio management, investor relations, finance, and management—on tasks like aggregating data, packaging reports and ensuring data accuracy.

Early adopters point the way forward

Private equity may have been slower to catch on to the digital transformation wave. But as early adopters prove the performance benefits, the shift from manual to digital portfolio data monitoring is gathering speed in the private markets.

For GPs, the question is no longer "if" but "when" and "what". With a host of adoption drivers adding to the sense of urgency along with the lure of proven ROI, private equity firms are finally prioritizing digital transformation and fast-tracking implementation plans.

Learn more about how GPs are tackling the challenges of portfolio data monitoring:

Download the full report

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

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