Keynote interview

Leveraging the power of technology

Tim Toska was recently featured in June’s PEI Fund Services Report where he discussed how private equity firms are increasingly turning to tech solutions to support everything from investor onboarding to portfolio management.


technology data on boardroom screen plus people in meeting

Interview

Q How far has private equity come in terms of its willingness to leverage technology to support middle-and back-office functions?

The industry has certainly come a long way, particularly over the past few years. The ability to leverage technol­ogy to support operations has moved from a nice-to-have to a must-have. A lot of that movement has been driven by investors in terms of the timeliness and granularity of the data that they are demanding, and that has placed an unprecedented emphasis on efficiency. Technology has inevitably been part of the solution, but this isn’t something that investors have foisted onto man­agers. It doesn’t work that way – it is something that needs to be embraced and we have undoubtedly seen a marked shift in managers’ willingness to do just that.

Q How is technology being used in the investor onboarding process?

Onboarding is a fantastic use case for technology because it is an area in which the private markets desperately need to become more efficient. Historically, onboarding has involved a huge amount of back and forth across paper trails, e-mail communication and calls. The ability to digitalise subscription docs and streamline AML and KYC processes using tech tools that weren’t available just a few short years ago, is proving transformative for the industry.

It is also incredible to see how far we have come in terms of LP portal devel­opment within a relatively short period of time. Just 15 years ago – which isn’t all that long ago, in the grand scheme of things – investors were receiving call notices by fax machine or even mail.

These investor portals have greatly improved, and continue to greatly im­prove, communication with LPs, while also creating significant cost and time efficiencies both for the manager and the underlying investor.

Q In light of the US Securities and Exchange Commission’s new private fund rules, how important is technology going to be in meeting regulatory demands?

Reporting requirements are intensify­ing as a result of regulation, including the new SEC rules, but they are inten­sifying in re sponse to investor demands in any case. It is therefore critical to have timely and accurate data at your fingertips as a private equity firm or administrator, which is exceedingly difficult without the use of technology. Technology can help with the sourcing of data and with moving that data across channels, which is what needs to hap­pen with any reporting process. Again, technology has really become a must-have in meeting the additional demands that fund managers face today.

Q What are the foundational steps that firms need to take to maximise the potential of the data that they hold?

Small firms can probably handle data requests and analysis in Microsoft Ex­cel. That becomes increasingly difficult to manage, however, as the business scales. It is therefore crucial that firms have a regimented plan around data from the outset, otherwise things can quickly become complicated, particu­larly when it comes to establishing a single source of truth.

Back-office teams, investment teams and marketing teams, for example, may hold different data sets that can often overlap. That data needs to be aggre­gated, normalised and validated until everyone is confident that the data they are accessing is based on the most accu­rate and up-to-date information. Only then can firms consider moving on to the next step of gleaning accurate and meaningful insights from the data and automating processes.

Q To what extent are private equity firms leveraging automation tools and data analytics today and what are the most interesting use cases?

At the highest possible level, there are three areas where private equity is exploring the use of automation: op­erations, portfolio management and investment decision-making. It is in the operational arena that we first saw many of these automation tools come into play. Any time you are dealing with a recurring process, such as an invoice payment, for example, that is a task that can be streamlined through automation.

Communication with portfolio companies, meanwhile, is another tan­gible use case for automation. Manag­ers require businesses to provide reg­ular updates on financial performance that are then fed into a data model up­stream. Automation can really help in processing that information, regardless of the format in which it arrives. There are tools that can be used to standardise the different balance sheet and income statements coming from portfolio com­panies, allowing the firm to compare apples with apples and to feed the data into valuation models. In some cases, this data is coming from hundreds of different portfolio companies and so the ability to process and standardise it without manual inputting is clearly a massive efficiency gain. Teams that would have acted as data aggregators are instead able to spend more time re­viewing and analysing the output.

By contrast, we are still in the ear­liest possible stages when it comes to automating investment decision-mak­ing processes. The focus for GPs right now is very much centred on creating a single source of truth, then employing automation tools to pull the relevant data so that humans can make decisions based on the best possible information.

Q What are the next steps for private equity when it comes to tech adoption?

What is most important is that we have now reached a stage where there is near-universal recognition of the im­portance of tech adoption. Just a few years ago, not everyone was necessar­ily sold on its benefits and tech adop­tion certainly wasn’t always viewed as the priority. That situation has flipped entirely. Of course, different firms are at different stages of that journey, but thanks to the now ubiquitous coverage of the benefits of automation in the mainstream media, we have got over the most significant hurdle, which is the willingness to embrace what tech­nology has to offer.

It is important to recognize that no one is trying to get to a point where automation software is being used to identify an investment target, carry out due diligence and then spit out a yes or no answer as to whether or not the firm should proceed with that deal. No one is looking to go to those extremes. Instead, firms are experimenting with using technology to identify market trends and carry out sensitivity analy­sis, and then build in the human judge­ment that sets them apart. The use of technology in private equity has never been about replacing people. Instead, it has been about maximizing the poten­tial of that human resource.

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