The technological and digital revolution has disrupted every industry, with no exception to private equity and venture capital. This industry has been relationship driven and relies heavily on its human capital not only to spot current opportunities but to also look years ahead in future. Even with the huge pace of technology innovation, codification of this human rationality may still not be possible but technology is definitely playing a prominent role in how PE/VC firms digitize their approach to investing. Private equity and venture capital companies are beginning to leverage technology and data to streamline their decision-making process, making it more efficient than ever.
A typical Private Equity or Venture Capital firm has access to huge and varied volumes of data to analyze. Relying on spreadsheets or fragmented tools allows them to just scratch the surface and this depth of information is no longer enough for GPs or for their increasingly experienced and analytical investors. The level of due diligence and scrutiny placed on GPs is higher than it has ever been. Hence the “conventional” methods are changing and PE/VC firms are embracing more effective techno-driven approaches. They are constantly monitoring how these technologies can benefit their own firms as well as maintain key metrics of portfolio companies
In the last one and half year pandemic has caused a lot of volatility. In such turbulent times with cashflows getting impacted the ability to forecast impact on expected returns across funds and investments has been a real challenge for GPs and their investors. It’s not just a reporting problem but warrants to have a technology solution in place that can track actual and expected cashflows as well as allows to apply forecasting models based on any changes to expected cashflows.
One of the most critical technology enablers over the last few years has been the success of cloud-based infrastructure. Many alternate asset industry (PE, VC) software vendors now offer cloud services (SaaS) to run specific functionality and there are a few end-to-end integrated solutions providers also. End-to-end solutions allow to manage the front and back-office operations not only in a secure manner but they also provide out-of-the-box integration options with a plethora of 3rd party systems/services. These SaaS solutions are then extremely modular in that firms can buy (license) the specific services that they need, such as: CRM; fundraising; deal management; fund accounting; fund management; reporting; analytics; investor portal; and portfolio management. With real-time accessibility from anywhere in the world and reduced upfront capital expenditure, private equity firms can now explore the benefits of Big Data and find new ways to apply automation to data sets and associated workflow processes, which are quite complex in private markets.
New age technologies are also making inroads in PE/VC space. For example, though slowly but some Private equity firms are also using artificial intelligence (AI) to automate human rationale and to support decision-making. Domain-specific and firm-specific algorithms are being written and tested and AI is gradually doing the analysis and due-diligence and in future this may even change the profile of junior analysts and investment managers in PE/VC firms. However, for these algorithms to work it’s imperative that data is captured by investment teams and partners systematically over a period and that’s in itself is a far-fetched goal for a lot of firms in alternate asset space.
The private equity industry has undergone a remarkable transformation in recent years. However, despite myriad advantages, there is still a long way for private equity to fully incorporate technology in support of deal decisions. It doesn’t require convincing anymore that spend on information technology, and decisions will be made much more quickly. The pandemic has definitely accelerated digitalization, bringing technological revolutions in every spectrum of the business world. It is inevitable that the next era of private equity will be defined by technology.
Authored by : Mr. Ankur Agarwal | Co-Founder & CTO, PE Front Office
Published in : BW Disrupt