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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:
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.