Three trends shaping fund services

Tougher fundraising conditions and more onerous regulation are just two of many challenges that are leading GPs to consider how best to future-proof their processes and operating models. Here, we look at how fund managers are exploring the use of technology to stay ahead of market developments, and how their changing needs are impacting the fund services support they are seeking from providers.

1Adopting AI

The focus on investor reporting has ramped up over the last few years, as regulators push for greater transparency, industry efforts to improve standardization gather pace, and LPs increasingly look to their fund managers for timely access to information that is both more far-reaching and more granular. At the same time, of course, the amount of information and data available for collection, analysis and reporting has ballooned.

Many private markets firms are looking to digital tools, including advanced technology such as automation and artificial intelligence to help. “I think AI is going to be a big part of data gathering and sorting on our end, so more information can be readily available for our investors,” said a COO and CFO of a venture capital firm at Private Funds CFO Network’s New York Forum in January.

“I think data reporting will be more interactive for the LPs, and they will use it to look at our portfolio companies and find out as much information as they want and communicate with us,” the COO/CFO added. “I think AI will also be very helpful in scheduling investments and creating better search tools and more interactive reports. It’s going to be an interesting next five years as GPs start taking advantage of more opportunities using AI.”

According to the Private Funds CFO Insights Survey 2024, conducted in partnership with Aztec Group, 59 percent of private fund respondents are exploring automation to enhance the operational performance of data capture tasks. Meanwhile, the Private Funds CFO Private Fund Leaders Survey 2023 found that data analysis and due diligence are the areas where executives believe AI will have the most transformative impact over the next five years.

“It is the abundance of data, not its scarcity, that is the challenge today,” says Agnes Mazurek, global head of private markets innovation at Apex Group. “Integrating data from a variety of sources, then using advanced analytics to make sense of that data is key. Machine learning and natural language processing are tools that allow us to generate actionable insights from data.”

There is significant variation in the extent to which GPs have adopted, or even considered, the use of AI. While some have developed their own AI tools or built specialist in-house teams, those firms without the necessary internal resources are looking to service providers with the expertise and scale to stay ahead of new developments.

2Turning to tech

It is not just data demands that are prompting fund managers to turn to tech solutions. GPs are operating in an increasingly complex environment, while also navigating fundraising headwinds. Global private equity fundraising totaled $784.9 billion in 2023, down from $822.6 billion in 2022, per data from affiliate title Private Equity International. Against this backdrop, the efficiency of fundraising processes, including investor onboarding, becomes ever more crucial.

“I think AI is going to be a big part of data gathering and sorting on our end, so more information can be readily available for our investors”

COO/CFO of a VC firm

“More and more digital platforms are starting to emerge to facilitate onboarding, AML and KYC,” says Serge Weyland, director general at the Association of the Luxembourg Fund Industry. “We are also seeing solutions that can assist even earlier in the fundraising process. For example, there are platforms that allow you to upload fund documentation before an LP has even signed a commitment letter and platforms that automate the digital signatures of LPs. Some also cover AIFM’s oversight requirements for pre-marketing agreements.”

Amid tougher fundraising conditions, managers have also been looking to attract less traditional pools of capital, such as the retail and private wealth markets. The democratization of private markets brings its own set of challenges, shifting the capabilities many GPs are looking for from service providers.

“Unlocking this scale has driven GPs to seek partners that have the ability to support hundreds, if not thousands of investors for onboarding, capital events, and reporting,” says James Jefski, global head of client solutions for private markets at State Street. “This has cascaded into increased GP demands for greater transparency, near real-time access to data and a self-service tool from their service providers… Leveraging modern technology such as robotics [and] AI for back-office throughput is becoming a key enabler to meet the demands for efficiency, process and data transparency.”

3Mitigating cyber-risks

More widespread adoption of digital tools and emerging technologies brings with it greater scrutiny of both funds’ and providers’ cybersecurity protocols. Some 43 percent of respondents to the Insights Survey say LP questions about cybersecurity have increased in the last 12 months.

In addition to upping investment in cybersecurity resources – which 49 percent of respondents to the Insights Survey have done over the last year – this scrutiny has led some GPs to put a greater emphasis on cybersecurity when fundraising. Speaking at Private Funds CFO Network’s Europe Forum in November, the finance director of a private credit firm said: “When our teams are doing fundraising… they involve IT to help describe what cyber-risk policies we have in place.”

In turn, managers have been scrutinizing third-party cybersecurity, including that of outsourcing partners.

Steve Darrington, a partner and CFO at Phoenix Equity Partners, which outsources its fund cash movements to a fund administrator, tells Private Funds CFO that the firm’s cybersecurity focus there “has been on rigorously reviewing the practices and processes of our third-party providers.

“Of course, irrespective of thorough scrutiny, these administrators are very much aware that the integrity of their business is entirely dependent on ensuring that they do what they do in a secure manner.”

Among all parties, the attention paid to cyber-risks is only likely to intensify, particularly as cybersecurity is also on regulators’ agendas. In 2022, for example, the US Securities and Exchange Commission proposed rules that if implemented would require private funds to comply with a range of cybersecurity requirements, including incident notification and disclosure obligations.