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Private equity funds are undergoing a technological revolution and the funds that are slowest to adapt will lose out. What can they do to catch up?
Growing data requirements from both investors and regulators put private equity funds under pressure to deliver. This is particularly true in the Cayman Islands, where recent regulatory changes mean private equity funds need a solid grasp of their investors, directors, AML officers, beneficial owners, service providers, as well as information about their fund's investment activity.
These changes have happened quickly - and funds that could once manage everything with a spreadsheet are finding themselves overwhelmed. Technology can help, but many funds are wary of adopting it, fearing they can't spare the time or money.
In fact, the greater risk is falling behind more tech-savvy rivals. Keeping up doesn't mean overnight digital transformation. Progress can be incremental to keep costs down, but funds should make sure they take action.
Why some funds fall behind
There are plenty of reasons why funds might get left behind. As our recent report The future of fund technology showed, some are simply reluctant to adopt new technology unless they are obliged to by a regulator. This might have been viable at one stage but isn't any longer.
Some smaller funds might believe they can handle everything manually. After all, data requirements from investors and regulators may seem manageable at first. However, in the medium to long term they will find that:
They sacrifice time that could be spent on other tasks simply to keep up with data requirements
They might find themselves trying to lower investor expectations just to meet them
This isn't a good approach to service delivery.
Other funds have technology fatigue. So much technology is available that it can be hard to know where to start, let alone know which might be best. Assessing technology takes people away from day-to-day activities, so they often put off these assessments, particularly when they perceive the potential gains as small. The risk in delaying adoption of new technology is that the competition has more time to get ahead.
The consequences of falling behind
Another problem is that marginal gains actually make a big difference. A technological tool or service that makes it easier to communicate between systems might seem a trivial tweak but with data demands increasing, the potential time-savings quickly add up.
Funds that connect their systems and automate some data collection tasks will be better able to fulfil their obligations to both investors and regulators. They will not only gain an edge on the competition but also raise the bar their rivals must meet. Investors will judge all private equity funds by the performance of the best they work with.
The sector tends to change organically and, gradually, investors will flow away from tech-laggards towards those funds on the cutting edge. They will look for a track record and an awareness of the marginal gains technology offers. The best-performing funds will draw capital from a wider base and may benefit from a virtuous circle: by performing better, they attract more investment, which leads to even better performance, further investment and so on.
How can the tech laggards catch up?
The sooner funds address their technology gap, the better. However, it is important to plan the process, because rushing into adoption can bring about mistakes that must be fixed later.
A good starting point is to identify your biggest obstacle. What part of your process currently takes most time? In The future of fund technology's survey, the most time- and resource-consuming activity was managing corporate actions, distributions or investor reporting. If that's true for your fund, this would be a good area to address using technology.
Next, talk to peers, service providers and other experts to find out what technology they use or recommend. During this fact-finding phase it can be useful to bring in experts like Intertrust Group. Once you have gathered a range of advice, you can shortlist three or four technologies to test yourself or work with a third party to find the best fit. From there, you can monitor progress, tweak your systems as necessary and, when you are happy, address the next biggest time-consumer.
An incremental approach allows you to extend your tech capabilities gradually, without a Big Bang overhaul that necessitates a steep learning curve for staff and other stakeholders. It also lets you manage costs and make steady progress without a huge hit to your budget.
Technological change need not be overwhelming. It can be both transformational and manageable. The greatest risk that private equity funds will take is ignoring technological change.
Why Intertrust Group?
Intertrust Group provides world-leading, specialised administration services for bespoke corporate, fund, capital market and private wealth services
With more than 4,000 employees in over 30 jurisdictions, we provide the expertise to help our clients thrive
We provide state-of-the-art technology, consisting of proprietary and leading vendor technology for a comprehensive offering to private capital fund managers, portfolio companies and banks
We can provide clients with 90% automation and straight through processing (STP), delivered across business verticals