Although the transformative impact of technology upon our personal and professional lives has been clear for some time now, the events of the last two years have highlighted just how valuable tech-enabled processes can be.
For private equity sponsors, tech transformation and digital enablement activities were often crucial to helping portfolio companies not only mitigate pandemic-related headwinds, but also drive growth.
While technology is increasingly becoming a key lever in value-creation plans and portfolio management more broadly, GPs are also employing tech tools to support their back- and front-office operations. Indeed, according to affiliate title Private Funds CFO’s Leaders Survey 2021, conducted in partnership with MUFG Investor Services, 70 percent of respondents expect tech investment to have the most impact on fund operations over the next five years, while 31 percent expect it to have a significant impact on deal origination.
Some GPs are now turning to these tools to help manage and harness the growing volumes of data available to them, whether that be gleaning insights during deal sourcing and due diligence, or collecting ESG data. The importance of data analytics is on the rise – almost three-quarters of private markets executives say it has become more important to their business over the last 12 months, per the Private Funds CFO Insights Survey 2022, conducted in partnership with TMF Group. With technology and data tools set to move higher up managers’ agendas, we outline three areas to watch as tech-enabled investing begins to take hold within private equity.
1 Leveraging AI
Just 3 percent of private markets firms have adopted artificial intelligence tools, according to the Private Funds CFO Insights Survey 2022, although 23 percent of respondents are evaluating the technology. And while managers are seeing the greatest benefits of adopting advanced technologies – including AI – in areas such as portfolio monitoring and risk management, a small but growing proportion are reporting a positive impact on dealmaking.
Three percent of respondents said emerging technology was highly effective in sourcing investment targets in the 2021 edition of the Insights Survey, compared with 8 percent this year. Meanwhile, the proportion that viewed advanced tech as highly effective in deal due diligence grew from 3 percent to 13 percent.
Deal origination is among the burgeoning use cases for AI in private equity. A notable example is EQT’s Motherbrain, an AI platform that helps source deals and inform decision-making. Yet AI tools could be applied throughout the life cycle of an investment, including providing data-driven insights that contribute to value creation.
There remain obstacles to greater take-up of AI in private equity, however. “One of the building blocks for the use of AI in private equity is good data collection and the standardisation of metrics,” says Ryan Chapman, a consultant at digital consultancy Palladium. “Private equity firms have been slow movers in this area, partly as they are reliant on data supplied by target organisations and from their portfolio companies,” he explains, adding that “there is still a lot of foundation work that needs to be done”.
2 Supporting ESG activities
AI could also be employed in an area that is gaining ever more attention from managers, investors and regulators alike – ESG. “AI can be used to both identify ESG topics that are relevant to different stakeholders and to source ESG news about portfolio companies,” says Carmela Mondino, head of ESG and sustainability at Partners Group. “This enables sponsors to have transparency into what stakeholders expect, and visibility on the positive or negative press coverage of an asset.”
Given the challenges involved in capturing, reporting and analysing ESG data, the adoption of a wide array of ESG-related tech tools could prove particularly fruitful. While efforts are underway to standardise data collection and reporting within the private equity industry, there is plenty of scope for tech solutions to help facilitate this and to streamline time-intensive processes. According to the Private Funds CFO Leaders Survey 2021, 65 percent of private markets firms still conduct fully manual ESG data gathering processes, while just 3 percent have a highly automated process in place.
3 Growing resources
With more tech programmes on the agenda – whether that be the digital transformation of portfolio companies or the application of data science within investment decision-making – private equity firms are having to step up their recruitment of highly sought-after tech talent. Hiring tech-savvy employees is a talent management priority for more than a fifth of private equity firms, according to EY’s 2022 Global Private Equity Survey.
Jack Denison, divisional head of executive hires at executive search firm La Fosse Associates, says: “The demand for talent is not just at executive level; it goes all the way to middle management and technical hires. It’s important to have the right tech leader in [place], but without the individuals to deliver the strategy, you can have the best plans, but executing them will be challenging.”
GPs are also ramping up their cybersecurity resources, both human and technological. Two-thirds of firms increased their investment in such resources over the past 12 months, according to the Private Funds CFO Insights Survey. While the shift to remote working has made firms more conscious of cyber-risks, they are also coming under greater scrutiny from LPs and regulators to keep the rising volume of data they are exposed to secure.
In February, the US Securities and Exchange Commission proposed new rules that would require funds to adopt written cybersecurity policies, report significant cybersecurity incidents and publicly disclose cybersecurity risks. The proposals are subject to a 60-day public comment period.
“The bulk of the proposals are around getting better at cybersecurity and getting more visibility into the reporting of cyber incidents,” says Christina Powers, a cybersecurity specialist and managing director at West Monroe. “This has not been enforced in the past, so it is going to require people to have better processes around how they do that, who will be responsible for it, and what is captured.”