Slowing growth, heightened regulatory pressures, increased competition, and greater investor demands are putting pressure on private equity firms to transform. In the past, general partners’ limited investments in information technology solutions didn’t seem to put a drag on their ability to deliver above-market returns.
But in today’s environment, private equity firms can’t skate by on offline, outdated, or siloed point solutions. They need to start thinking about technology as a competitive advantage and tool for enabling growth, not just as a cost center.
Firms that continue to under-invest in technology will be challenged to grow and sustain returns, meet investor and regulatory expectations, and manage operational risk. While many firms (with the exception of the mega firms) thrived for years with minimal investments in technology applications, five key trends are putting pressure on private equity firms to invest in advanced technologies (see table below). The key question is: How do firms strategize, prioritize, and select the key areas to focus their technology investments?
In our work with private equity firms, we typically advise clients to evaluate three areas before making IT investments:
1. Current technology infrastructure maturity;
2. Business model complexity – firm size, number of funds, geographic footprint – and executives’ strategic vision for the firm;
3. Unique regulatory and investor pressures.
Firm size and complexity also influences technology investment strategy. This chart outlines the four broad categories of automation priorities: deal and portfolio management, finance operations, investor relationship management, and supporting functions.
Capabilities in green tend to be key investment focus areas for smaller firms but are often already automated in larger, more mature firms. As a private equity firm grows in maturity and complexity, we see a shift in focus to more of the priority one and priority two capabilities, namely in finance, reporting, and enterprise solutions.
Over the next one to two years, we expect to see these trends emerge:
• Smaller firms are likely to invest in automating foundational capabilities, including fund and partnership accounting, portfolio group management, and investment (deal) management;
• Mid-size firms will be prioritizing their technology efforts to automating capabilities within their operations, investor relations, fundraising, and relationship management;
• Large firms may be eyeing next-generation digital solutions that help enable business transformation. Among targeted capabilities are regulatory, investor, and management reporting, enterprise-level business intelligence (BI), content and document management, workflow, and robust finance management.
In general, while each firm’s technology investment strategy will vary depending on its business priorities and existing technology infrastructure, Deloitte has been seeing private equity firms focus their investments on:
• Modernizing core applications to support opportunity and deal tracking, portfolio company data collection and analysis;
• Cloud HR and finance solutions, including reporting improvements;
• Investor portals, including support for data integration and reporting capabilities;
• Big data analytics platforms to support all aspects of the business, including research, deal valuation and portfolio company operational optimization.
To scale operations to meet growth or expansion objectives and to manage increasing regulatory and investor demands for information, firms should consider investing in technology solutions such as cloud-based HR and finance platforms, performance management solutions, and modeling and analytics solutions.
Private equity firms seeking to quickly scale up their IT infrastructure should consider technology solutions that enable seamless data integration and connectivity to provide consistent views of information, superior service and modern digital experiences for investors, and advanced analytics to support strategic business needs.
The good news is that the cost of ownership for these technologies has dropped significantly in recent years due to technology advances such as cloud Software as a Service (SaaS). The cloud has become a true technology disruptor, especially for the private equity industry. Cloud solutions’ licensed subscription model offers a lower-cost and shorter-time-to-market alternative to traditional on-premises solutions.
Another factor driving down cost is that many of today’s solutions are highly configurable and business user-friendly, requiring smaller IT teams for maintenance. The key to getting the most value out of technology investments is to make sure they are aligned with business strategy. To drive alignment, firms should develop a technology roadmap that lists required investments; factors in evolving regulatory requirements and industry trends; considers the firm’s appetite for change; and includes a proactive approach for addressing risks.
The first step when developing the roadmap is to clearly establish the technology program’s vision and objectives. This will help the program team prioritize the functional areas that require technology investments. For example, firms aiming for operational efficiency and cost reduction should focus on building a solid foundation of core capabilities such as partnership accounting, investor portals (document distribution), and pipeline/deal tracking. Once the foundation is in place, firms should evaluate and prioritize more sophisticated solutions that can deliver a competitive advantage.
A firm’s appetite for change may impact the sequencing and speed of technology initiatives. Mid-sized or smaller firms may hesitate to take on large technology programs owing to limited resources. Another consideration is new technology’s impact on business processes and the firm’s ability to help users manage the change. Embedding change management efforts into the roadmap is important.
The roadmap also should consider the evolving industry environment. The firm may have to prioritize initiatives to meet regulatory requirements and/or protect against potential risks over those that may provide better return on their technology investments. As firms undertake these large technology programs, they should give special consideration to addressing cyber risks. For example, the roadmap should include implementing robust information security procedures and technologies to counter cyber threats and manage confidential data or competitive intelligence.
Last but not least, the roadmap should clearly outline the benefits or value achieved from each initiative.
What’s next for PE firms?
Over the new few years, the PE industry will see more firms move away from manual, offline solutions and invest in robust, modern technology, especially as investors and regulators demand improved transparency and responsiveness, deals become more competitive, and growth continues to slow. Combined with the rise of digital and cloud-based platforms that offer lower costs and easier implementation, the opportunity cost of not investing in IT technology solutions may be significantly higher than the actual cost of implementation. Already, first movers are capitalizing on increased efficiencies, reduced costs, and enhanced competitiveness. It’s time for their peers to get with the (technology) program.
What’s driving tech investments?
1. Increased competition for deals
• Need to compete for deals globally
• Need for differentiated due diligence processes
• Need for next-generation analytics for complex deals
• Data integration to provide unified views across due diligence teams
• Advanced analytics to unlock deal value (market sentiment analysis, advanced modeling)
2. Renewed focus on generating operational value
• Ability to analyze large amounts of data to identify operational improvement levers
• Ability to analyze data across multiple portfolio companies in the same sector
• Advanced analytics (data- and information-driven optimization and value-generation)
3. Growth and global expansion
• Need to scale operations to support global footprint and varied investment strategies
• Need for increased transparency across business units/locations
• Cloud platforms and applications
4. Investor demands for information and transparency
• Manual reporting processes are no longer sustainable
• Data consistency and accuracy becoming paramount for daily/weekly reporting (as opposed to monthly/quarterly reporting)
• Next-generation investor reporting solutions (mobile, self-service)
• Data integration and reporting providing more frequent, consistent reporting
5. Regulatory pressures
• Process automation and controls (reduced reliance on Excel)
• Improved reporting capabilities
• Investment in operational risk management
• Cloud platforms and applications
• Cyber security.
Roland Waz is a principal in Deloitte Consulting's financial services and technology strategy practices
This article is sponsored by Deloitte. It was published in the September supplement with pfm magazine.