This article is sponsored by Hamilton Lane.
To what extent have the private markets embraced technology?
Ironically, this industry has been slow to embrace technology, despite having funded an enormous portion of innovative tech companies around the globe. This is partly because private equity firms are simply not set up to purchase things. Rather, they are people-centric businesses focused on originating and transacting on deals and, to date, they have required a relatively limited number of tools to effectively do their jobs. This has been an asset class that has largely relied on email and Excel for the past few decades.
But this is beginning to change, partly because there is now more technology available and because firms are recognising that technology is a strategically important way to differentiate themselves from the competition.
The other factor at play here is scale. There may be thousands of fund managers out there, but the vast majority have no more than a couple of hundred LPs. Dealing with that customer base without the use of heavy technology has largely been doable. But now, not only are the expectations of those LPs rising rapidly, but with rapidly growing interest in the asset class from non-institutional investors, the scale of the investor base is going to increase dramatically as well.
Do you believe the democratisation of PE is going to stimulate greater tech adoption?
I think democratisation will be the biggest driver of all. The scale issue alone is going to force the need for change. But it is also about how people expect to transact in today’s world. We are accustomed to being able to buy anything on our phones – including shares of a stock – and we are accustomed to rapid access to information.
On the public side, if you are thinking about buying a stock, there are multiple platforms to facilitate that. Your ability to quickly do historical and real-time research and then immediately acquire that security has been perfected.
Now imagine you are presented with this opportunity to move into private markets, but are told you can’t do any of those things. You are sent a 200-page subscription document which needs to be reviewed, scanned, signed and returned. You would throw your hands up and say this is crazy. I think it is this customer pressure that will ultimately lead to change.
Where are you seeing opportunities to invest in companies that can support this technology-led transformation and why is now the right time to do so?
The private equity industry has been doing things the same way for so long that it can be hard to contemplate change. Firms are used to dealing with large institutional investors with access to external or internal resources, and most have yet to grasp the implications of working with individual investors who are committing tens of thousands of dollars, not millions of dollars. Recognising that the world is changing is going to be the first battle and that battle is only now getting started, with very few players even realising this new reality.
The next challenge is to identify companies that understand these problems and that are applying technology to provide solutions. We have a long history of strategically investing in a variety of franchises that not only make us as Hamilton Lane better, but that make the industry better as well. That remains a core mission for us.
Finding technology focused on improving the customer experience – onboarding, access, fund management, etc – and finding technology that allows us to improve as an investor and manager – around analytics, data ingestion and operational efficiency – are the priorities. We are rethinking all different aspects of the way the industry operates because the current iteration is slow, laborious and expensive.
What are some of the most interesting developments you are seeing?
The idea of digitalising or tokenising securities is particularly interesting. Simply turning something that is almost physical into something digital is a huge first step to creating ease of use around transactions. And while the ability to buy seamlessly is important, so is the ability to sell. The private equity secondaries market is flourishing at the moment, for example, but it is still an inefficient and institutionally orientated environment. We will need to think about ways in which investors, committing small amounts of capital, will be able to obtain liquidity in a time-efficient and cost-efficient manner. Again, technology will provide the answers.
Have you invested in businesses providing that kind of solution?
We are invested in a business called ADDX in Singapore that is running a digital exchange. You register as a customer in much the same way you would when opening a Charles Schwab account, for example. There are a small variety of private markets funds available today – including Hamilton Lane’s Global Private Assets Fund – with very low investment minimums. You can move money from your checking account linked to ADDX to make those purchases and then you can sell those fund interests as well.
It is still early days and, much like Amazon began life as an online bookstore before branching out to sell other products, these exchanges will grow and evolve over time. We are also invested in an exchange in the US called Securitize.
It is important to note that these are regulated exchanges because they are transacting securities. We’ve partnered with these companies to offer some of the same private markets funds that institutions are investing in. These have been converted into digital securities but remain regulated by the appropriate bodies in their respective jurisdictions, and are available to accredited investors in those jurisdictions.
What advice would you offer to firms that have yet to fully embrace technology within their organisations?
Technology is going to become a critical differentiator, and it is time to recognise that. Of course, this industry is about generating returns, but it is also about customer experience. We need to make sure we are supporting our customers and making their lives easier. We also need to run our businesses more efficiently. This is a competitive market, and so being able to do things faster and cheaper is not only better for you as a firm but for your clients as well.
I would also point to the regulatory environment. Regulators are increasingly focusing their attention on private markets as they expand and cater more to the high-net-worth/retail space. This is another driver towards greater technology adoption.
Finally, there is the huge potential that is data mining. The private equity industry is now several decades old and is sitting on a massive amount of data, and for us, that created an opportunity to utilise technology to analyse that data to support better investment decision making and to better inform our clients.
Erik Hirsch is vice-chairman and head of strategic initiatives at Hamilton Lane