Why advanced tech is the future of private markets

Firms that integrate advanced technologies into their investment decision-making processes will be better able to compete in the alternatives marketplace, says Alter Domus’ Head of Data & Analytics, Gus Harris

technology data on boardroom screen plus people in meeting

What are the key drivers for private markets to embrace artificial intelligence and other advanced tech?

The rapid growth and large size of the alternatives market has been matched by a growing amount of data that needs to be managed. As managers and funds get bigger, we are heading towards a point where that data becomes too much to handle, and we need more thoughtful discussions about how all of this information gets put to good use.

Secondly, the amount of data that is being demanded and delivered to GPs – even without that market growth – has broadened immensely. There are ever more reporting demands, whether they be ESG-related or linked to a greater need for transparency in certain aspects of the business, as well as in financial metrics.

Thirdly, the ultimate investors in the alternatives space are also demanding more information and transparency from their GPs.

All of this is happening against the backdrop of technology having rapidly evolved over the last five to 10 years. A lot of these demands to process more data – to use that data and to communicate that data more quickly – are happening just as the possibilities offered by technology are profoundly more expansive than they used to be.

A lot of tools that one needs to process this data are now available off the shelf from technology providers – especially from the cloud providers. Those providers have become a lot better at providing more than just software or hardware, and are instead offering enhanced computational capabilities, with AI falling into that camp.

So, demands have grown exponentially, and at the same time capabilities have come along significantly, which makes this a good time for private markets to embrace advanced tech. For a lot of participants, it is important to think about how to adopts me of this modern technology while preserving the investments made previously. We don’t have perfect information about how technology will continue to evolve, but anyone thinking about what to build today needs to consider their ability to pivot down the road as new technologies continue to emerge.

Is it now essential that private markets participants get on board with these tools?

Yes, it is, but the specifics will vary on a case-by-case basis. The more expansive and demanding the operation, the greater the need will be for investment and adoption of these tools and technologies, including big data warehouse platforms, modular application architecture, high speed computation and AI. More investors will be demanding more information, and portfolios will be larger and products more complex, and this means adoption needs to be more involved.

The extent to which managers get on board with these tools depends on what they really need in terms of modern tech and modern capabilities. A lot of firms could fall into the trap of overshooting and investing a lot more than they need to. Many will also fail to invest enough, and of course investment from the organisation is a lot more than just money, but also people, infrastructure, time and culture.

For a large expansive fund, it will be a big investment to adopt the tools to address complex problems, but a smaller operation may want to be a little more surgical in how much they adopt. Even so, the technology challenge does need to be addressed with modern tech, whether your fund is €300 million or €3 billion. Even a smaller fund, if they don’t think about this properly, could be building a trap around technology for the future, by making decisions now that in three years’ time will leave them with an archaic and unscalable infrastructure. It is expected that any technology transformation will embed some tech debt due to the nature of trade-offs that will need to be made, but it is also important to understand the extent of the tech debt that is being built into the system as part of the planning process.

Building a function for the future often involves wider discussion in the business to include key decision-makers. Unless you have a technology strategy in place that is consistent with the demands and expectations of your key stakeholders, you are going to encounter many challenges.

In my experience, almost every manager I speak to understands there is an organisational challenge around the technology capabilities of their institution. Even those at the beginning of the journey understand it is a complicated problem and a huge investment decision that should not be taken lightly. This journey is as much an organisational challenge as it is a technology challenge.

How can firms mitigate the risks associated with implementation?

The first risk is the risk of doing nothing. That is fairly significant, because it leaves you saddled with whatever you are doing now in a world where your competitors are surpassing you. The key question here is whether others around you are moving rapidly with advanced technology and whether you feel you are going to be at a disadvantage in terms of raising money, delivering performance, providing investor transparency and executing on decision-making if you fail to keep up.

The other extreme is the risk of diving into this with an old-school mentality, making a huge investment and simply laying out your requirements and asking someone to build you a solution. The concern there is that you expend a lot of resources to get something built and then find it is not really what you needed. Unfortunately, buyer’s remorse is not uncommon.

Another risk is building something good but not being able to maintain it. If you outsource the work and don’t really understand how it all operates, you may find out later that the total cost of ownership is exorbitant and the cost of changes is unacceptable. You want a solution that is manageable and nimble rather than unwieldy.

At Alter Domus, we work with our clients to approach tech transformations in stages, with discrete deliverables along the way. Success is users starting to see practical and usable solutions relatively quickly and often that they can begin using in their everyday work, which reinforces the project as stakeholders become more engaged.

A third mitigant is that solutions need to not be so intricately connected that the system is a monolith. It is preferable for the system to operate as a series of cogs that can be enhanced, replaced, or removed without impacting other parts of the solution. A lot of pieces need to be independent of each other but architected in a way that creates one elegant experience for the customer. Today’s technologies afford this possibility.

We are firm believers in building solutions for clients that can be maintained in a low-cost way. We don’t want our clients burdened with a system that will slow them down and prove costly to change and update.

What kind of shift in mindset is required to embed modern tech capabilities?

Going about this journey requires a cultural transformation, which needs careful change management that starts during the planning process. The possibilities and the limitations of the technology need to be understood. It begins with the leadership team to ensure that the organisation understands what is possible with technology alongside a focus on what the business really needs.

The change management aspect is also significant. The shift in mindset has to be around change being a good thing: we are going to be more efficient, and your job is going to be focused on more high-value activities. The organisation needs to communicate extremely well, manage expectations, and be ready for consistent enhancement and improvement.

What challenges with legacy systems might firms encounter and how can those be overcome?

A lot of legacy providers are on their own modernisation journeys, so it is important to understand how those systems themselves are going to be transformed, with some taking a more proactive approach than others. You may find that your legacy provider is not aligned with your technology journey. It’s wise to think about ways to adopt your modern technology and embrace it, without taking it for granted that all your requirements need to go through the legacy system. Maybe you can bypass your legacy system and find a new way to solve a problem. This would be a classic case of disintermediation for some legacy systems providers. If you think your legacy system is going to impair your ability to make decisions, it may be better to just start afresh.

But you definitely want the provider of your legacy systems, whether internally built or not, to be thinking about how they are going to modernise. If they are not, that may be a worrying sign.

What are the key elements to get right for a smooth transition to modern tech?

The key elements are communication, managing expectations and identifying early wins that will spur you on to the next phase. Breaking a problem into smaller chunks, with wins along the way, is really important. This is not a ‘one and done’; this never ends. You need to be always thinking about your total cost of ownership and what it is going to cost to not just build a new system, but also maintain it. Ask yourself all the time whether you are getting what you really want, which means being careful on your requirements, involving all your stakeholders, and being sure to build something that is really fit for purpose.

This article was originally published in PEI’s Fund Services Report.

Key contacts

Gus Harris

Gus Harris

United States

Head of AD Data & Analytics


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