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A silver lining to the covid-19 pandemic has been the acceleration of firms’ digitization plans as they adapted to working remotely. And in large part, that shift appears to have been smooth.
A chief financial officer whose firm’s primary strategy is natural resources explains that investments in this area had already been made prior to the pandemic. “Everybody was already on a laptop and we converted to Zoom over a year ago, so the transition to working remotely was very seamless.”
Such is the necessity for the back office to get up to speed, the CFO adds a warning: “People who are not very fluent in technology will definitely get left behind.”
“We have always had a workforce that traveled extensively and therefore rely on cloud-based technologies,” says the CFO at a venture capital firm. “We had rolled out Zoom to our workforce about two years ago and I would say we are now power users. That said, we have not increased our investment in digital technologies as a result of the pandemic, although the general market has trended in this way.”
However, despite the increased attention paid to technology that enables remote working, such as video meetings and digital signatures, engagement does not stretch as far as investing in innovative technologies, such as artificial intelligence, robotic process automation and machine learning. According to the Private Funds CFO Insights Survey 2021, adoption of these three technologies remains stubbornly low, languishing in the single digits.
Although still minimal, interest in waterfall automators has ticked up over the last year, with adoption levels rising from 6 to 12 percent. For 45 percent of non-adopters, a preference for Excel outweighs the potential benefits of automating waterfall calculations.
For the vast majority of respondents, the convergence of AI and private equity is still a future event. More than two-thirds of respondents expect the greatest impact of AI to be felt in five years, and almost a third in a decade.
Among financial services sectors, private equity is not unusual in its slow conversion to the benefits of advanced technologies. Across the industry as a whole, the deployment of AI in the back office is minimal, says the natural resources-focused firm’s CFO, and in future, although the automation of processes will happen, it is likely to be slow.
One reason is that “PE is a people business at its core and AI solutions don’t solve these types of problems,” says the CFO of a growth capital firm. When it comes to being convinced of AI’s usefulness, the CFO is not alone.
Joshua Cherry-Seto, managing director, CFO and chief compliance officer at Blue Wolf Capital Partners, notes: “For a mid-market GP like us that manages 10-15 or 20 portfolio companies, there is interest in automation for portfolio monitoring. Track record isn’t enough for LPs interested in the portfolio. But there’s not enough [perceived value] to think through AI.”
However, Omar Hassan, CFO at Cloverlay, which has automated invoicing across the business, believes AI and automation should be embraced more. “There’s a misinterpretation of what those terms mean. It’s not replacement of humans, but instead working smarter and more efficiently,” he says, adding that even small organizations hold a lot of data.
In the future, Hassan says Cloverlay plans to “further automate the reconciliation process between our shadow books and our fund administrator and tax provider. We’re seeing some great technologies such as lifting data off of PDFs to help digitize financial statements and capital notices. That’s just the beginning.”
The gap in awareness is “primarily because there don’t seem to be any service providers focused on educating alternative asset managers on the application and potential benefits of adopting these technologies,” says a CFO at a direct lending firm. “While I am familiar with robotic process automation and conceptually think it could be helpful, I have not had the opportunity to explore it further and have not come across anyone doing sector-specific outreach.”