One of the clear trends identified in our Private Funds Leaders Survey 2021, conducted in partnership with MUFG Investor Services, is a trend toward greater use of external service providers, with compliance and IT identified as the two areas most likely to see increased outsourcing over the next two years.
With technology playing an ever more important role in private markets firms, the prohibitive cost of either buying or building in-house solutions is the second most significant reason for outsourcing, cited by over half of survey respondents.
Fund operations is the area deemed most likely to be impacted by technology investment over the next five years, cited by 70 percent of respondents, but this is closely followed by portfolio management. Meanwhile, tech innovation is also expected in the fields of fundraising, deal origination and investor relations.
“Technology has been critical and broadly deployed for years in fund operations and other administrative areas,” says Frank Nash, founder and managing member at ATL Partners. “The most significant change going forward will be how we increasingly employ technology to gather information regarding fundraising and deployment.”
“We expect to see all areas of our business impacted by tech, starting with fund operations and portfolio management,” adds Jeff Pentland, managing director at Northleaf Capital Partners. “We are increasingly seeking to leverage technology in our fundraising and sales – through CRM – as well as prioritizing our origination approach.”
Gareth Whiley, managing partner at Silverfleet Capital Partners, meanwhile, is cautiously looking ahead to a time when artificial intelligence starts to raise its head. “I think the use of technology at a GP level is an interesting challenge,” he says.
“We already automate a fair amount of what used to be done manually, in portfolio monitoring; valuations; ESG data gathering and origination screening. But, as with all tech, the real prize is getting insight from the data and working out what changes you can implement as a result. I hope that can never be fully automated, as none of us will have a job, but that’s the next stage of development. Can you predict when you need to intervene? Are there opportunities that are being missed?”
Compliance and IT are the areas respondents deem most likely to be more outsourced in the future. Fund accounting and tax are the areas LPs are most keen to see in external hands. LPs’ growing demands for granular data, delivered in a format that suits them, is adding to private markets firms’ administrative burden and increasing the need for tech solutions and outside support.
Over two-thirds of private markets leaders say they are spending more time dealing with LP data requests than they were two years ago, with over half adding that more LPs are requesting data that follows standardized formats, such as that developed by ILPA.
“We are seeing more detailed demands and more detailed RFPs, as well as an increased focus on ESG and diversity, equality and inclusion,” says Pentland. “To that end, we have partnered with an RFP software provider to increase our efficiency and to ensure consistent responses across our multi-asset class platform.”
And it seems clear that a combination of LP demands and technological developments will only see more private markets firms looking to outside help.
“There is no doubt that outsourcing is going to increase,” says head of product development at MUFG Investor Services Mike Dickey. “If it doesn’t add to a sponsor’s competitive edge then it makes sense to consider an outsourced option.”