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With Assets Expected to Double in the Next Few Years, Private Equity’s Operations and Technology Backbone Is Catching Up Just in Time

Alternative investments, including private equity, are the fastest growing sector of asset management, but a lack of digital capabilities and costly inefficiencies could still hamstring the industry.

In November 2020, Preqin predicted global private equity assets would double to $9.1 trillion by 2025, but, according to a new report from Citco, this growth depends heavily on the resources that private equity firms are willing to put into something more prosaic: administrative initiatives. 

In the paper, Citco researchers agreed private equity operating models will be driven by both data integration and collaborative platforms leading up to the 2025 milestone. The private equity industry has gotten the message that systems and technology infrastructure is essential for growth. The authors of the report predicted that data integration will be standard practice and commonplace in just four years due to industry-wide demand for automation and cybersecurity. 

That means getting away from practices like using email to send sensitive information and instead using encrypted processes, a standard practice in other part of the asset management business.

“In general, the theme is more data and linkages,” the report said. “Everything will require more data points, attributes and ways of linking payments to deals, such as ESG ratings.”

The private equity industry is known for its ability to act quickly on investment opportunities or raise funds for specific objectives. But to continue to do that, they need collaborative platforms. Citco argues that the collaborative platforms, which are digital spaces that allow a flexible work environment for communications between managers, lawyers, accountants, and investors, will be implemented on a massive scale by 2025. For instance, shared communication tools in which only approved members can converse are valuable and secure tools for firms. 

“In most fund administration scenarios, client-facing teams work with a smaller number of known clients,” the report said. “Therefore, the ability to communicate with anyone in the world — which email offers — is not a necessity. There is more value in the security of communicating with known parties.”

Scott Gockowski, senior manager at asset management strategy consultant Casey Quirk, part of Deloitte, agrees with Citco’s assessment of the need for these type of platforms. “The emergence of collaborative cloud technology is enabling efficiencies and limiting operational risks,” he said. 

For the private equity industry to experience the level of growth Preqin predicted last year, Citco authors recommend firms significantly ramp up their internal digitalization efforts. The private assets industry still relies on standard tools, like Excel sheets and PDF documents to get things done. The authors propose all firms adopt proprietary collaboration platforms to eliminate versioning issues and to streamline online payment processes. For deals with hard deadlines, authors argue these administrative functions can mean the difference between “settling on the due date and multi-day delays.”

Lauren Dillard, head of investment intelligence at Nasdaq, believes there are plenty of solutions that could be implemented to solve these problems. “There’s really no reason that an investor needs to get their information from the hundreds of asset managers they invest in in a PDF,” Dillard told Institutional Investor. “There is increased allocation and so technology needs to enable that, and frankly also enable the outcomes that the investors are looking for across a variety of managers.”

Off-the-shelf tools also do nothing to help with fraud. 

“The bad actors are getting more sophisticated, and everything is getting more and more digital. Again, technology has to enable and keep up,” Dillard added. 

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