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Technology the biggest challenge for GPs in growing their firms

Conducting effective due diligence on the host of tech options available is both time and resource intensive.

Technology is holding firms back in their quest for growth.

In a poll of delegates at PEI’s CFOs & COOs Forum 2019 in New York last month, 55 percent said technology has been the biggest challenge when it comes to growing their firm.

With a host of options available, choosing the right technology can be the most difficult part of the process, especially for a small firm. The largest portion of delegates surveyed – 49 percent – said the most important theme of the event was “what technology is worth spending the time to understand.”

“The challenge is in the technology overload and constantly being pitched by new technology providers claiming to automate everything under the sun,” Heramb Ramachandran, chief financial officer of eco-centered private equity firm XPV Water Partners, told pfm. “There is no one technology that fits all at a PE firm, so the challenge is in finding a technology stack that will inevitably involve multiple vendors and applications.”

The cost – both in time and money – of carrying out due diligence on potential technology options to invest in “is particularly challenging for smaller PE firms that lack an in-house IT function,” he added.

However, technology isn’t just a problem for small firms; some of the largest firms in the industry also face difficulties in this area.

Technology such as artificial intelligence can help save time, but it’s hard to put the benefits of technology investments into exact numbers. In many cases, a CFO has to make a decision even when “you can’t produce simple ROIs that say it’s going to be worthwhile,” Blackstone CFO Michael Chae explained during an on-stage interview.

“I think technology is, in a lot of ways, the most challenging piece for all of us,” he said. “In terms of measuring benefits, a lot of the business people in your firm think those metrics are easy to come by and provide to them, but they’re not always easy to produce in the short term.”

Investing in the right people is also key to making tech work for your firm. When asked what he would focus on if he were a mid-market firm with a limited technology budget, Chae answered attracting and retaining talent.

“Finding them in what I call a hot labor market – which often lags the actual market – is a real challenge,” he said. “A firm like that obviously won’t have unlimited resources to create an infrastructure, [so] looking at third-party alternatives, outsourcing, is natural.”

However, for some smaller firms, focusing on attracting talent in itself can be too time and resource intensive.

“Attracting technology talent to a firm is not practical when your firm is resource constrained, therefore, this function falls to the CFO/COO,” Ramachandran said.

Outsourcing aspects of technology is a typical solution for private equity firms, but even that can have its issues. Outsourcing, just like choosing technology, can hinder a company if it doesn’t end up with the right vendor or support staff. Teri Hightower, CFO of Oklahoma-based fund of funds manager Spur Capital, told pfm that all her firm’s technology support is outsourced, and this can eventually become an issue.

“It is a challenge to keep an outsourced IT group engaged,” she said. “They come in strong and helpful, but over time we get pushed back and get less and less support. I am in the position right now of deciding if I want to go through the process of looking for a new group. I would really like to have a full-time IT person, but it is just not possible with our size.”

Despite the difficulties that come with implementing new technology, 79 percent of firms said they are most likely to buy and customize technology in order to improve their in-house functions.