The private equity (PE) industry is booming according to a 2017 BCG report, with more firms operating than ever before. But the report also stressed that, with competition for capital being at an all-time high, firms will need to work harder than ever to differentiate themselves in this crowded field.
For a private equity fund to become a top performer, BCG says firms must be ready to embrace digital technology in their operations – with potential benefits ranging from streamlined communications to easier portfolio management, faster deal speed and simpler compliance.
Here’s a look at how technology is disrupting private equity funds, and how employers and hiring managers can prepare their private equity fund for this digital future.
Big Data and AI automation
Private equity firms often deal with huge amounts of information, yet much of it is still processed manually in spreadsheets and documents. When this data is spread across multiple departments, this can lead to inefficiencies and inaccurate reporting.
This is especially problematic when timely and accurate reporting is essential for meeting regulatory and compliance requirements. According to a 2017 survey taken at the Private Equity International Private Fund Compliance Forum, almost half of attendees considered data management an operational challenge, and almost two-thirds planned to automate their data management.
Advanced data management systems can benefit PE firms in many ways. For example, they can make it easier to conduct due diligence on new deals, and track existing fund information such as investment vehicles and holding companies. They can also accelerate accounting and finance tasks such as valuations, expense reporting, fees and performance reporting.
As well as improving efficiencies, more private equity funds are leveraging data for strategic advantage by ramping up their use of Big Data and analytics software. Used in PE transactions, it can help to improve the execution, speed and integration of deals. It can also help to identify potential issues more quickly, for proactive problem-solving and better deal transparency.
Even deeper insights can be gained through the application of AI and machine learning (ML) technologies. As an example, Chinese/US PE firm Hone Capital has been able to use a ML model to better predict future deal success, based on AI analysis of 30,000 deals from the last decade. The firm found that the best results came from integrating human recommendations with those from the machine-learning model.
The importance of cybersecurity
As more private equity firms embrace digital technologies such as cloud computing, data analytics and mobile computing, protecting their digital assets against cyber-attack becomes a critical concern.
According to an analysis by PwC, deals are especially at risk because they often involve many different analysts who are exchanging confidential, deal-critical, price-sensitive information. The cost of a breach can range from loss of reputation or brand, to severe legal and regulatory actions.
As cyber-attacks become ever more common and sophisticated, PE firms will need to build up their cyber-defenses – firstly by assuring staff receive adequate training on cyber-security risks, and secondly, by adding the right cyber-security talent to their IT teams.
The rise of blockchain
High levels of trust, collaboration and transparency between fund managers, investors and regulators is a cornerstone of any successful private equity fund deal. Blockchain technology can facilitate this with its use of a “distributed ledger,” which allows all participants to simultaneously edit, store and verify the same transaction information.
A blockchain solution recently developed by US financial firm Northern Trust creates records and documentation for investments by limited partners. This allows the fund to easily transfer ownership stakes, and be managed, serviced and audited on a transparent platform. As more PE funds adopt blockchain administration, it could ease communication between partners and investors, and open more private equity to secondary markets.
Building a talent strategy for your private equity fund
It’s no secret that digital technology can solve many of the problems facing the private equity sector today.
To achieve competitive advantage, PE firms will need to reassess their talent needs accordingly with private equity jobs. This may involve bringing aboard data scientists, automation experts and AI programmers, as well as certified cyber-security professionals and people skilled in blockchain and other emerging technologies. It will also require upskilling existing staff in these new digital systems, policies and processes – from digital reporting and data management, to increasing their cyber-security awareness.
First and foremost, firms will need to be able to assess their current situation, and build a strategic roadmap that includes determining which technologies are best suited to solving each challenge. Achieving this will require people skilled in not just technology, but also soft skills in leadership, communication, strategy, and creativity.