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It’s a telling example. Only a tiny minority of firms, 6 percent, use a waterfall automator to help with this fundamental and complex calculation, according to our latest Private Funds CFO Insights Survey. Many do not believe automation is necessary; others have been unable to find a system that works well or been put off by poor reviews. Some have not had time to explore automation or already outsource waterfall calculations. More than a third simply prefer to use Excel.
There is a huge amount of chatter around the potential for technology to streamline any number of functions from preparing financial reports to conducting deal due diligence. It might be surprising then, that while some GPs are reviewing their approach, only 10 percent have concrete plans to automate waterfall calculations.
However, this fits an overall trend. A significant majority of respondents have yet to even review adopting artificial intelligence, robotic process automation or machine learning tools. A small minority are evaluating their usefulness, while only a sliver have already implemented them.
When asked about the impact of AI on back office functions generally, one compliance officer is not alone in noting, “I’m not informed enough to comment on this.” Another respondent adds that he suspects AI is “being over hyped at the moment.”
Of those firms that do use new technological tools, enthusiasm is markedly muted. Barely 3 percent believe technology has been highly effective in back office management. More than half rate the effectiveness of technology on investor relations, risk management and returns as “low”. This disappointment rises to 70 percent in deal sourcing and 76 percent in due diligence. But one respondent does note that “AI might be able to help with some deal-related decision making, for example sorting through some high-level inputs to see if a deal is worth pursuing.”
Most managers believe the impact of AI will be felt some time away (five years = 53 percent; 10 years = 43 percent). John Otterson, partner at Jackson Square Ventures, points out that “AI/ML has been evolving for decades and still has a way to go to find truly compelling business applications, let alone singularity. There is certainly an opportunity for further automation in the back office, but it is difficult to predict how/when/where that will happen – perhaps further data aggregation … is the near term play.”
Another CFO adds: “I do not believe [AI] will have a significant impact in the short term or medium term on investment management firms, with two notable exceptions: one, large-scale players (ie, bulge bracket firms) can invest [in new technology] and ultimately see some benefit over time, and two, I believe that outsource service providers, in particular third-party administrators, should invest and will benefit from AI so long as they have a practical plan and throw enough internal resources to make it a reality.”
GP reliance on external service providers to meet their technology needs has already shifted the burden to keep abreast of innovation onto those with specific functional expertise. “GP expectations are forcing fund administrators to be more tech-savvy,” says Fred Steinberg, SANNE’s managing director for North America.
In turn, outsourcing to the more tech-aware is allowing back office teams to alter the way they work. “The role of the back office has become less routine-based and more project-based (routine work is usually outsourced),” says Dimitri Korvyakov, CFO at Sandton Capital Partners.
eFront chief executive Tarek Chouman sees a continuation of this swing. “In the future, we believe, GP back office staff will shift focus and work increasingly on the analytical side of the business and less on producing reports or sending emails or generating financial statements.”
Whether or not they use technology directly, it seems certain that AI will play a significant role in determining the size and shape of back office teams. In a tech-dominated world, says Chouman, “employees will be more client-facing and involved in decision-making tasks.”