By its very nature, the world of tech solutions is always changing, and in the private funds market, innovation seems to be at an all-time high.
However, some technologies are still a long way off from being adopted across the board in the private funds industry. A longstanding reticence to take on costly new systems and retrain staff on new processes is still prevalent among some fund managers, especially in areas such as automating waterfall and carry calculations.
But attitudes are shifting. More than two-thirds of private funds managers believe the introduction of increased automation and new technologies over the next five years will be vital to giving their fund a competitive edge, according to data from Intertrust Group.
Here, we look at three ways in which the landscape for automation, systems and technology is changing for fund managers and vendors alike.
1Managers get comfortable with tech
The introduction of tech to fund administration may once have been looked upon by managers with confusion, derision and likely no small amount of fear. Having used manual processes and well-known tools like Microsoft Excel for so many years, it took a while for smart new tech solutions to pick up steam.
However, as with the vast majority of developments in the private markets, vendors that were able to demonstrate that new tech solutions could give managers a competitive edge soon found themselves in demand across the industry.
Development and funding into software and automation solutions for the private funds industry has gone from strength to strength in recent years, buoyed by a growing trust from fund managers that if their last technological investment had been a success, maybe they should invest elsewhere too.
As such, advanced technologies like artificial intelligence and blockchain are just some of the solutions now on offer.
However, that doesn’t mean there is no longer a need for education around tech’s potential in the private markets, says Bhagesh Malde, global head of private markets at SS&C Technologies. “[Microsoft] Excel is still the standard, in part because it’s a perfect tool for the individual operator to be in full control. The new technologies don’t have that same kind of flexibility, and that intimidates people.
“They can feel like black boxes, when actually these new solutions offer more control over their data, more transparency and greater collaboration opportunities.”
2Momentum builds for waterfall automation
Despite a general acquiescence toward the implementation of technology within fund processes, private funds managers have particularly held out against one form of automation – that which calculates their carry and waterfall systems.
Private Funds CFO’s Insights Survey 2022 found that a lingering preference for using Microsoft Excel was listed as the most common reason as to why two-thirds of respondents remain determined to avoid waterfall technology.
Yet that hesitancy toward tech is slowly evaporating. The share of firms embracing tech solutions for waterfall calculations in place of spreadsheets reached 18 percent this year, up from just 6 percent two years ago. A further 16 percent of respondents say they are planning to adopt technology into their waterfall calculations.
“I am definitely seeing a much bigger and stronger trend towards leveraging automation and technology to support waterfall models and carry allocation plans than ever before,” says Dean Schaffer, head of the capital administration group at Alter Domus.
However, resistance to change can still pose a challenge, particularly if tech advancements in other areas of fund management are seen as more essential than introducing technology into carry and waterfall systems.
Kanav Kalia, chief sales and marketing officer at Oxane Partners, says: “If you contrast these systems with trading systems, portfolio management systems or investor reporting systems, the latter open up opportunities for additional alpha and can be used as a marketing tool for funds when they are fundraising. Systems that reduce operational risk might not be as high up the priority list.”
In an age of increasing LP scrutiny into private funds’ operations, tech solutions that can eliminate the risk of human error may be able to distinguish themselves from manual processes.
Says Schaffer: “The technology has a clear benefit over spreadsheets in being able to do these calculations with a lot more granularity, a lot more efficiency, a lot more speed, and with an institutionalized format with strong checks and balances.”
Obstacles to wider adoption remain, including issues around the ability of the tech currently on offer to process complex data.
Yet Sean Murray, global head of product transition and product integration at Apex Group, remains optimistic about the future of waterfall technology and its popularity among fund managers.
“Far wider adoption is inevitable, and we are certainly headed in that direction. Increased flexibility around the software, and advances in the way you can manipulate data within software, will certainly help propel us down this pathway. We may not ever get complete automation, but we will definitely get a lot further along the road.”
3Is AI the future?
Conversations around the efficacy of using artificial intelligence within fund processes have long centered on what the technology is able to achieve on a limited set of data.
“Without a vast array of underlying data in a digital format, AI does not have anything to work from,” explains Andrew Tarver, founding partner and head of Motive Create, the value-creation team at Motive Partners. “Many would expect the private equity industry to have well-defined processes, making it easier to apply AI, yet each deal is different. Every set of quantifiable financials requires additional qualification and robust questioning.”
But in certain areas of the industry, fresh attention is being paid to the use of AI, with a growing number of tech-savvy firms exploring the use of it in the deal origination and curation spaces.
A well-known example of AI being used in this way is EQT’s Motherbrain, which “can ingest massive amounts of information about deals, people and companies and build useful algorithms on top of it,” according to Motherbrain head Alexandra Lutz.
With AI also being deployed in key areas like due diligence and exit processes, it seems the technology is only at the start of its journey in private funds.