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Are private capital funds embracing technological innovation?

26 October 2021

Nandakishore Divakarla

Head of Innovation

Nandakishore Divakarla

Head of Innovation

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Our survey and report considers why private capital funds may lag behind in adopting the technologies that will help them remain competitive

Digital evolution in private capital funds is being driven by increasing complexity and competition. Our major report, The Future of Fund Technology, finds that technology is a critical added value and competitive differentiator.

Of the 300 senior-level decision-makers in private capital firms we surveyed, 62% said they expect to invest more in technology over the next two years.

To some extent, adoption is shaped by the nature of data generated. Much of a private equity fund’s data – beyond internally generated data such as accounts and investor relations – has an external source which is limited to the life of a transaction.

For instance, when a fund is looking to buy a company, conducting due diligence or performing a valuation, data is shared by the target company. If the deal fails, the target company takes it back and the fund manager has no further access to it.

Such considerations have a bearing on which technologies are most suitable for adoption and the amount to be invested.

Third-party administrators versus in-house for fund administration technology

It is critical to differentiate between the in-house operations of a fund and the tasks outsourced to third-party administrators (TPAs).

Our report finds that only 17% of funds handle all administration in-house, with the majority using TPAs in part of their business.

While some of this involves technologies such as machine learning and big data – which typically work with a majority of unstructured data in combination with structured data – the data in this case will mostly be structured.

Internally generated data – including relatively routine tasks such as waterfall calculation capital call, subscriptions, calculation of carry and distribution of profits – is not really big data.

Big data use: due diligence and research on target companies

The main area where big data is applicable is in researching target companies. In the real-estate sector, for example, you might see big data usage around geo mobile data, footfall and social media sentiment.

Overall, two-thirds of respondents reported the use of data analytics in fund administration, but where specific technologies such as machine learning and robotic process automation (RPA) were concerned that fell to 26% and 23% respectively.

We must separate future plans around technology from actual implementation today. Big data usage is currently consigned to specific areas of a fund’s business.

When asked which technologies will be most important in the future, blockchain (46%) and big data (37%) come top. Robotic process automation (10%) and machine learning (6%) lag behind in future adoption plans.

Given the lower levels of automation and data creation among these funds, the scope for machine learning is limited, at least in some areas. Therefore, the main role for big data in a private capital fund lifecycle is in evaluating a  company for investment – a front-office activity in which a fund administrator does not play a role.

Looking to the future: complexity, competition and risks of technology

None of this is to downplay the complexity and competition driving the need for automation. It is this that explains the high level of respondents expecting to adopt new technologies.

Private equity is a relatively unregulated industry compared with, say, the mutual fund industry. This should make adoption of new technologies easier as there are lesser regulations forcing conformity to a particular procedure or preventing adoption. If a technology makes sense, private equity firms will use it.

Funds must continually orient themselves to their investors, to raise money and keep them happy. Being technology-enabled will be a benefit. Greater automation should mean fewer errors and greater efficiency and productivity. Furthermore, as investors become more tech-savvy, technology adoption becomes imperative.

Technology has a key role to play in maintaining and improving service quality, as well as in increasing predictability and standardisation.

A private equity fund has a limited life. It is created to raise money, invest in companies and then sell them. Caution around investment in technology is therefore to be expected.

This is not purely a cost issue, particularly for larger funds with bigger reserves where technology investment is not a major part of their returns. Technology investment is not a large part of their total returns. For smaller funds, cost barriers are more relevant.

Larger funds generally have a longer-term view and this may be one reason why they invest more in technology. Among firms with assets under management over $1 billion, 60% favour pioneering technologies – suggesting they see tech as an important tool for competitive advantage.

Private capital funds of all sizes increasingly see the opportunities afforded by automation – with generated savings going straight to the bottom line. Hesitancy is often related to fears that novel technologies are insufficiently battle-tested.

But with reporting requirements and investor demands for data increasing, funds must tackle their concerns and view technological innovation as a necessary part of efficiently servicing investor needs.

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Why Intertrust Group?

  • A strategic partner offering a full-spectrum service tailored to meet all back-office needs throughout the lifecycle of a private capital fund. This against a background of ever-increasing reporting demands.
  • Proprietary innovative technologies are combined with global knowledge and experience to deliver added-value services catering for all asset classes, while increasing manager visibility of portfolios on behalf of a fund’s investors.
  • Expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations and portfolio management.
  • Offers bespoke solutions for funds of all sizes to meet administration requirements so they and their partners can concentrate on investor relations, fundraising, closing deals and profitable exits.
  • We help funds to navigate the increasingly complex regulatory environment with solutions tailored by jurisdiction and specific compliance requirements.