Rewriting the rulebook: how technology is disrupting PE

Panellists at Allocate agreed that the impact of technology is now being felt across almost all industries, and that, where disruption was once more a focus for venture, it has increasingly become an everyday part of the entire fund management landscape.

"Disruption becomes particularly interesting in the buyout space," said Nazo Moosa, co-founder and managing partner at VT Partners. "The bulk of the buyout market is about implementing meaningful operational change within a portfolio company, but this is typically against a steady market backdrop. If these industries become volatile [due to technological disruption] – and almost every industry is becoming more volatile – that makes the gearing model more challenging. Interestingly, disruption is now not only taking place in some of the more glamorous segments such as media, but in many other more asset-intensive industries. No industry is ‘safe' anymore."

Nevertheless, disruption continues to present a number of possibilities for fund managers that adopt a disciplined approach, according to Partech co-managing partner Jean-Marc Patouillaud. The firm, which has invested in venture since 1991, has recently launched a private equity strategy focused on supporting incumbents looking to respond to shifting sands within their markets.

"We distinguish between firms that are clearly disrupting the rules and are disintermediating a value chain, those transforming existing businesses by better efficiency or digitalisation, and those enabling the power of data," Patouillaud said. "New technologies – particularly in the finance and healthcare space – are able to extract an incredible level of value from data: sharing and exploiting it while protecting the privacy of the owners and without risking any breach of identity."

Practice what you preach
Inevitably, tech-related progress is also having a direct impact on the fund management space itself. On the fund-related services front, this has been evidenced by a number of large deals in the fund administration software space in recent years, one of the most high-profile of which was HIG Capital and General Atlantic's £1.65bn sale of FNZ to Caisse de Dépôt et Placement du Québec. But an increasing number of GPs are also fundamentally adapting the composition of their teams and their overall investment approach in order to respond to growing competition.

"On the growth side of our business, we decided to take a page out of the venture capital playbook," said VT's Moosa. "Not in the types of companies we invest in, but in our approach to sectors that are volatile. It is essential to have people on your team who are specialised and know those sectors well at a very deep level. Additionally, in the past five years or so, a lot of our sourcing is now based on data and not just on relationships; fuller and faster data sets bring advantages to sourcing. That may be even more important in venture, but we are certainly starting to see, on the growth front, how that is transforming the business."

Partech's Patouillaud agreed that one of the main impacts of ongoing disruption has been an increased demand for specialisation among fund managers. "At Partech we realised that we had to get out of certain areas where the investment team did not have expertise. We only focus on tech businesses that involve 1s and 0s. But it is not only a question of being specialised and having the right skills and backgrounds. It is also the case that we are not simply investment partners. We are also there to add value to the portfolio. We have an entirely separate team that comes into play after the investment process is completed and is there to help on the business development and HR side. These people also have to be deeply specialised."

The convergence of private equity and venture capital approaches is something that Frode Odegard, CEO and chairperson at research and advisory firm The Post-Lean Institute, expects to accelerate in the coming years. "It is very attractive from an LP perspective to combine the innovation you see from venture with the discipline and constancy you are more used to seeing from private equity," he said. "We believe there will be a hybrid asset class to finance high-order organisations – entities set up to build new organisations from scratch, with a consistent value-creation methodology and consistent method of analysing the structure of these industries. This would be based not on a deal-by-deal or firm-by-firm basis, but by capitalising on how an industry structure is being rewritten and attacking it from multiple vantage points."

The second edition of Unquote's Allocate AGM was held on 19-21 June at the Grove in Hertfordshire

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