Keeping up with technology integration in private markets

Investors are asking their fund managers how they plan to scale their firms and grow AUM without adding headcount, said CFOs and COOs at the Private Funds CFO Network’s European Forum earlier this month. Attending reporters were not allowed to name speakers or other attendees.

They say more technology integration in the middle- and back-office is the answer.

Typically, GPs have chosen to focus more on the front office, where they have used CRMs to improve the fundraising and deal flow process, as well as deal sourcing, with firms like EQT rolling out Motherbrain in 2016 to identify potential investments.

“Overall the spend is more in the front office. I don’t think that will change for a few years at least,” commented the director of group finance operations of a prominent PE and infrastructure manager. Not that front-office technology is without its challenges. Data fragmentation and alignment with portfolio companies continue to present issues for managers.

Taking ownership and control of tech deployment is key to success, attendees said. The CFO of a pan-European private credit firm said they are integrating their tech with loan servicing partners in the private credit space, for example, and centralizing all deal-specific data. “It is critical for us to have accurate asset return information and also respond in detail in a challenging fundraising environment to investors,” he remarked.

Moreover, with heightened volatility in the market, technology tools can help operations teams gain a better sense of valuations.

This can go a long way to improving the LP experience.

A cultural shift

The pandemic drove an explosion in adoption of tech solutions, as firms coped with remote working and frenzied demands for information from LPs while defending their investments against a slumping market.

But now that many managers are broadly back to the office, the cultural shift that led to more open-mindedness over technology needs to be maintained, especially as AI tools rise to prominence.

COOs need to demonstrate that any new technology adoption – front or back – is a journey that requires buy-in across the firm. And creating a culture of patience when it comes to tech can help to ensure continued progress. Speakers advised that COOs adopt an approach of acceptance that technology will never be perfect, and sometimes even fail the firm’s objectives, but remain committed to learning from the experience.

“Strong sponsorship is needed to drive change and lay out the business case – if you don’t know why you’re doing it, it’s going to be hard later on to expect others to adopt it. Start with a simple use case, solve that and move forward to the next one,” suggested the managing director of a London-based specialist consulting firm.

Another industry expert added that strategic coordination within the firm can help to manage the direction of progress, saying that if there are five or six teams involved in the project, there should be at least one or two “ambassadors” from each team to explain to the wider team the benefits of using the proposed tech solution.

In-house data management control

Make sure the data you use is centralized, creating a single source of truth, another attendee said. “Put controls in place on where the data is being captured on the way in. It will pay massive dividends downstream when you want to use it across the firm and report it.”

Most PE groups will experience an increase in the number of data sources and data providers they use over the coming years. Owning that data and managing it in-house will be vital to value creation, even if some procedures are outsourced.

“There is huge value in the data that we cache. It wouldn’t be possible to outsource it as it is critical to our investment process,” commented one CFO.

One of the more popular technologies being tested by CFOs is Microsoft 365 Copilot, a new productivity tool that uses large language models to perform tasks including content creation – ie, asking it to generate a draft proposal from meeting notes. It can also provide snapshots of previous discussions, or share meeting slides, and can be added as a team member on company calls.

This technology is just one of myriad ways in which AI could improve operational efficiency for PE firms over the coming years.