Are PE houses too slow on the digital uptake?

Private equity firms are sometimes accused of being slow to change their way of working, especially as digital and more efficient solutions are developed that eclipse their potentially more labour- and time-intensive processes.

At Evestment, a company that develops tools for due diligence and portfolio monitoring, director of private equity solutions Graeme Faulds believes the business will win over an increasing number of private equity industry clients in the future: "Evestment started out in the traditional asset class space 15 years ago to tackle the same problems that existed in the private market space. I think the private equity space is ripe for benefiting from that move toward greater digitalisation."

Small players catch up later
Kevin Kelly is the CEO of Altvia, a customer relations management software for raising and deploying capital. Asked whether there is a reluctance within the industry to innovate, he says: "On the surface I would say yes, but I would not say there was an aversion to innovate or an attempt to slow things down. Traditional financial services have quite a head start because of the volume and the operational efficiencies that can be gained by having systems that allow them to operate at scale."

Kelly points out that it is possible for an investor relations or fund accounting team to do things in excel, which wouldn't be the case with a brokerage house or a stock exchange. "It probably would not have made a tonne of sense for private equity firms to make huge investments to improve operations, because there would not have been a return there."

Indeed, many of the software tools used by traders working on the stock markets and other more traditional asset classes are designed for a much larger market. Private equity firms, on the other hand, are often smaller organisations that could simply get away with just continuing with their existing tools. Nevertheless, Evestment's Faulds sees emerging incentives for PE investors: "Paired with increasing allocations to private equity, there has been an improvement in developing high quality software solutions on a more bespoke basis. The private asset class is growing and software solutions are becoming more sophisticated and easier to implement."

If you make better informed investment decisions, theoretically, over time you will make more money. However, there is reluctance among some buyers to make the market so transparent that secondaries returns are lowered" – Kishore Kansal, PEFox

Private equity houses do remain selective when it comes to new software, particularly at the smaller end of the market. Nick Money-Kyrle, founding partner at Steadfast Capital, says a firm's size remains an important factor: "We use customer relations management software, because it is important to track the multiple meetings the team has with intermediaries and advisers, and for team members to have access to the key points discussed. Specialist portfolio management software is, however, not necessary due to the type and size of our portfolio."

More strategic factors can be at play too. PEFox is a data-driven advisory firm for the secondaries market; its managing partner Kishore Kansal argues that secondaries players in particular have little interest in becoming more digital: "There is a desire among some buyers to keep the market inefficient and opaque. When pricing secondary interests, having an insight and informational advantage is vital to gain an edge on competitors. If you make better informed investment decisions, theoretically, over time you will make more money. However, there is reluctance among some buyers to make the market so transparent that secondaries returns are lowered."

Pressure from several directions
As well as software improving and becoming more affordable in recent years, the incentive to digitalise operations might also come from other directions. The AIFMD brought new transparency requirements related to annual reports, investor disclosures and regulatory reporting. Says Kansal: "There is pressure on regulators to make alternative investments such as private equity, hedge funds and real estate funds more transparent. This forces funds down a digital path as, in the modern world, one of the main ways to make data more accessible is through digital publishing." He also urges the industry to be more pre-emptive: "I fear there is a risk that if the industry does not respond voluntarily to demands for greater transparency, regulators will intervene and impose stricter rules on disclosure."

At the same time, limited partners are increasingly demanding more information from GPs. Last year, pension fund PGGM in the Netherlands announced it will not back fund managers that fail to disclose fees by 2020. This shows calls for more transparency also come from fund investors. Altvia's Kelly notices them asking more questions nowadays: "LPs are no longer okay with just an annual report. They want to know how you came up with your valuations and what the benchmarks and processes were that you used. What is the data that you are collecting from the underlying portfolio to support that valuation?"

Although the container of information has not changed, Kelly thinks LPs now want a lot more detail to back up the summary level information. Money-Kyrle, on the other hand, says he has had no pressure from LPs so far: "I have never had an LP try to push us towards using certain software – but then we offer good transparency and believe our LPs are happy with our reporting to them."

Despite private equity lagging behind in certain areas, there are clear sings this is going to change in the near future. Be it more affordable and user-friendly technology, or pressure from regulators and investors, private equity has many reasons to embrace the 21st century.

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