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The top three considerations in choosing a private equity technology partner

11 October 2021

Growth in the volume of data at private asset management firms is driving key decision makers to revisit how technology plays a role in generating insights, decisions, reports, and ultimately value. This transformation brings with it new decisions for firms when determining an optimal technology strategy and investing in portfolio data management. What are the key considerations when choosing a technology partner?

What data do you have access to - and how do you want to use it?

Before fund managers can assess technology solutions, they need to explore what information they have and think what they want to do with it. Often data is unstructured, inconsistent, and living in a variety of different places around the firm. Many firms look for new technology when they want to extend their data collection - for example, if they want to begin tracking ESG metrics from portfolio companies or borrowers - but that should not distract from developing a sense of the data "status quo" and defining key goals.

Beyond thinking about static data, it's also important to think about workflows that bring new data into the firm on a regular basis, often in disparate and unstructured formats. Data ingestion from portfolio companies or sub-advisors is an obvious yet often overlooked starting point for assessing portfolio monitoring software. Historically, managing this flow of data is one of the most difficult problems to solve.

The good news is that technology advancements have brought clear benefits to private equity. Platforms now offer new ways to pull in data, as well as ways to use it. For instance, GPs can now create internal, sector-specific benchmarks for portfolio companies to identify performance issues while lenders can gain visibility into a company's overall risk profile to make informed investment decisions.

Should we use a suite of solutions or a point solution?

Some firms may gravitate toward a technology solution that touches every function, from deal teams to valuations to investor relations, while others may want to solve a specific problem. The choice between a suite of solutions and a point solution depends on a variety of factors.

One key question is how prepared the firm is to spend time on technology customization. While a large organization may benefit from adopting a state-of-the-art data lake surrounded by a range of API-powered custom software solutions, a smaller firm without a CTO may find that daunting.

Another factor to consider is how technology will impact your operational model, and vice versa. Many firms are now making more strategic assessments around outsourcing functions like valuation or data ingestion. Those decisions are deeply intertwined with technology since they impact how and when you share data with third-party providers.

Every firm is juggling a different set of considerations when making this decision. Whatever those are, an important way to assess technology providers is to understand their track record. Have they encountered similar fund managers in the past? If so, they may be able to help you consider the different scenarios and guide a thoughtful discussion of the right implementation model.

How will you evaluate the ROI of your choice of software?

Often asset managers don't measure the return on investment of a software implementation and only look at the cost of the software. A more useful metric may be thinking about the time saved by using software and the value of that time.

Managers also should consider what new capabilities they have gained, such as internal benchmarking, sensitivity analysis, and advanced reporting. For example, better data transparency allowed some fund managers to quickly respond to investor requests with reporting and analysis in the face of the unexpected events of the COVID-19 crisis. Similarly, the bandwidth gained through software solutions enabled tech-savvy lenders to capitalize on the pandemic-inspired demand for distressed debt and special situations funds.

IHS Markit recently asked clients to quantify some of the productivity gains they saw after using iLEVEL software. In the study, available here, portfolio management functions estimated they saved 125 hours per person, per quarter. Seventy-one percent of respondents said their data accuracy improved, allowing them to better service their clients.

Robust strategies to monitor portfolios, analyze information, and respond in a timely fashion to changing conditions are becoming essentials for asset managers. With the help of the right technology partner, fund managers can collect, organize, and analyze data in the right way, enabling them to better understand their world and to provide more value to investors.

This blog post is based on a conversation between PEStack's Tim Friedman and IHS Markit's Jocelyn Lewis. You can watch the full recording here.

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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