Analysis

Private capital’s technology tipping point


technology data reflected on spectacles scaled

Corporate history is littered with examples of companies that dominated their industries for decades but neglected embrace technology and innovation and paid the price.

There are some very well-known examples: The now defunct video giant Blockbuster passed on Netflix, the once unprofitable start-up DVD postal-renting service with a current market capitalization of close to US$270 billion. Netflix disrupted its own model and utilized internet technology to produce on-demand content.

Kodak, who filed for bankruptcy in 2012, developed the first digital camera back in 1975. It was reluctant to reposition the business towards digital given the high amount of investment required and was swept aside amid the development of smart phones, tablets, and the global embrace of digital photography.

Regarding smart phones, Nokia sowed the seeds of its own decline by not recognizing that app-based software would form the basis of the mobile phone’s future. There is clear causal relationship between its focus on physical devices and its fall of market share from 51% to 5%.

Slightly closer to home for private markets is the ongoing battle for digital supremacy in the global banking sphere. The rise of so-called ‘challenger-banks’, who offer streamlined, digital-first retail banking services, has undoubtedly disrupted the industry.

The vast majority of incumbent, traditional banks – both global and regional – were incredibly slow to adapt to digital models for their consumer servicers. With legacy IT applications prevailing and technical debt building up, banks lack of clear-sighted strategy to deal with both digital transformation and changing user needs and expectation was evident at the tail end of the last decade.

It is of course incredibly unlikely that digital players such as Atom Bank, Tandem, Monzo, and Starling Bank, Revolut will replace traditional banking players. The size of wallet-share and financial resources incumbent players have is vast compared to that of the challenger banks.

However, what it has done is rapidly accelerate the digitization of these institutions in efforts to ensure account balances, reduced cost-to-income ratios, higher customer acquisition and retention either stabilize or grow. From transforming their operational technology infrastructure to building customer-centric apps, banks have had to follow where more-nimble and agile ‘new-banks’ have trod.

Indeed, challenger banks development of seamless user experiences, quick and easy account registrations have all been aped in the broader market. No banking app would be trusted without the enhanced security measures pioneered by digital first entities, and the integration with third party applications is a trend that’s set to continue across all modern platforms.

As digital services take an ever firmer grip over financial institutions’ product suites, how customer data is managed and how customer needs are need met with that technology will undoubtedly determine which banks take a greater share of future customer dollars.

What can private capital learn?

Private capital is now facing a similar technology tipping point which has the potential to reshape the long-term make-up of the market. Managers that take on the opportunities provided by cloud computing, data analytics, automation and AI will thrive. Managers that wait too long will fall by the wayside.

There are multiple areas where technology is transforming how private markets managers run their businesses:

1. Data management and investor reporting

Global private capital assets under management (AUM) climbed to US$14.5 trillion in 2023, according to Bain & Co, more than triple the levels from a decade earlier in 2013.

The rapid growth in AUM has meant more funds, more transactions and higher reporting expectations from investors who now have a much bigger exposure to alternatives to manage. With more capital at work in private markets, investors are demanding more bespoke, granular data and more frequent reporting on portfolio performance.

This demands that managers upgrade their reporting infrastructure, and technology is a key enabler of this.

Private equity’s roots lie in small, nimble teams of dealmakers with low overheads and small back-office teams. As the industry has grown, however, managers have had to invest more in back-office support to keep up with investor expectations.

Firms that move early to harness technology, outsource or co-source back-office functions, invest in cloud-enabled infrastructure overlaid with best-in-breed fund accounting technology will pull ahead of their peers. Factor in utilizing data warehousing and taking advantage of advanced data analytics and the gap will widen further still between those who have and haven’t transformed their business. 

2. Rising regulation

Growth in AUM has also led to a rise in regulatory scrutiny and step-change in regulatory reporting, compliance and disclosure.

Alongside higher expectations around investor reporting, closer regulation has placed additional pressure on manager operating and finance models.

A failure to take advantage of the technology available in the market to drive back-office efficiency and keep compliance costs in control will lead to managers having to spend more senior resource and time on regulation and compliance and less in the core business of sourcing, managing and exiting assets for the best returns.

3. Tech-enablement of the front office

AI, automation and predicative analytics are also transforming how front office functions work, with firms utilizing these tools to free accelerate deal origination and free up dealmakers to spend more time on the high-value tasks of building relationships with deal targets and running negotiations.

First-mover in the industry already have AI-enabled platforms in place that allow deal teams to expedite deal selection, benchmark valuations, monitor sector trends and combine third-party and inhouse data into a single data repository that can be mined to assess deal opportunities and get dealmakers up to speed on new deals at pace.

Managers harnessing these tools report significant benefits, with some claiming that technology has helped them to identify deal targets as much as a year before peers and achieve superior deal conversion ratios.

4. New fund structures and a broader array of investors

Private markets have a growing history of innovation where it comes to developing new ways of organizing and attracting investment. One such example is the recent momentum behind ‘Open ended’ funds (OEF), which have given retail investors an access point to alternative markets.

While this ‘democratization’ is a positive, standing up and managing an OEF is rife with complexities: from more investors and more redemption requests to a huge increase in producing accurate NAV calculations, the management of these funds can be challenging. The right technology is key to the success of these vehicles.

At the other end of the wealth spectrum, the appetite for High Net Worth Individuals (HNWI) to dip their toes into alternative waters has also grown, no doubt spurred on by the above average returns of private markets investment and an opportunity to diversify their portfolios.

Indeed, Boston Consulting Group estimate that by 2025, HNWI in private equity alone will rise to a staggering $1.2 trillion. Each HNWI’s needs may differ wildly in terms of data requirements and reporting. Meeting their needs will not be done effectively with legacy tools and systems.

The right partner, armed with the right technology

Managers do not have to undertake this transformation of their business structures alone, tech-enabled service providers such as Alter Domus have the tools and experience to support managers through this technological inflection point.

As trusted partner to hundreds of managers, Alter Domus has developed deep, lived experience of what is required to upgrade technology and operational infrastructure in practice.

The administration and fund accounting infrastructure that would have been perfectly adequate to manage a private equity fund 15-years ago is now no longer fit for purpose. Best-in-class technology and digitally powered fund operations have become essential for private market stakeholders.

Alter Domus’ Digital Workflows Application was developed as a response to the market need for a transformative technology. Workflows is designed to handle the volume and complexity of private equity funds and builds a “digital bridge” between client and fund administrator. Clients are already reaping the benefits of this market leading capability; as our partners at leading asset management house, Coller, have commented:

Alter Domus Digital Workflows application has significantly improved our fund administration experience. Its utilization of automation and AI, combined with digital access to each part of the process is enhancing our transparency, operational efficiency, and data accuracy

Coller Capital

As well as the enhanced transparency across our clients’ fund portfolio, Workflows ends the reliance on outdated communication channels such as email and phone calls and turns data into an analysis-ready single source of truth.

At Alter Domus we understand that the investment required to keep pace with technology and innovation, coupled with the risk of disruption to process that have underpinned success for decades can be daunting. However, the consequences of not acting are far more severe. Alter Domus is here to aid and support our clients in taking those next, transformative digital steps.

Key contacts

Demetry Zilberg

United States

Chief Technology Officer

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