Establishing a centralised point of contact and a single source of truth is critical for portfolio monitoring and reporting, says Pratap Narayan Singh, senior director and head of private markets at Acuity Knowledge Partners.

RD: What is your view of the current portfolio monitoring and reporting landscape across the private markets industry?

Pratap Narayan Singh: In our latest private markets study, we discovered that private equity and venture capital firms are spending about one-fifth of their time on portfolio monitoring. Portfolio monitoring is an essential component of overall fund operations, driven largely by demanding investors. 

The level of tech sophistication employed by private equity firms varies significantly. About a quarter of firms are using third-party tools, while another 25% have developed tools in-house. The remainder continue to rely on Excel spreadsheets.

Many not-so-tech-savvy firms are devoting an increasing amount of time to portfolio monitoring and reporting instead of their core competencies – deal origination, due diligence and value creation. There is, therefore, a clear need for technology to promote efficiency. But technology adoption in this space is a work in progress. 

There are a multitude of challenges tied to data, as well as reluctance on the part of internal stakeholders. In addition, PE and VC firms face increasing complexity in the deployment of tools. To illustrate this, more than 75% of respondents to our 2024 private markets study, spread across regions and designations, stated they use multiple tools and systems in their operations. More than 70% would welcome a one-system tool to streamline operations, as complex and disjointed systems, in their view, brought inefficiency.

RD: What is likely to drive greater tech adoption going forward?

Singh: There is increased pressure from investors and regulators when it comes to portfolio monitoring. The new private fund adviser rules adopted by the SEC in August 2023 mandate greater transparency with respect to audit and reporting. There is a clear understanding that as private markets continue to grow exponentially, there will be greater scrutiny and expectations on accounting practices. 

Technology has an important role to play in helping private market firms remain compliant with regulations, particularly as their operations become more complex. Firms are increasingly dealing with multiple assets, spanning private equity, growth capital, private credit, real estate and infrastructure. A firm investing in hundreds of companies across several investment strategies will likely find it extremely challenging to manually monitor everything. The spreadsheet-based model will fall short of expectations of all stakeholders across fund reporting and monitoring. 

RD: What are the bottlenecks or challenges that private equity firms face when it comes to embracing technology?

Singh: One of the biggest challenges preventing private market firms from embracing tech solutions is diverse preferences of teams and individuals, making it difficult from a change management perspective. 

Everyone prefers their own systems, which can lead to a lack of cohesion across an organisation. In our survey, 86% respondents stated that their organisation uses multiple software or tools. In addition to the challenge surrounding the deployment of different data management methods by diverse teams, there may be reluctance, in general, to adopt new technologies. 

Furthermore, investment teams may be rigid in their choice of data management techniques, involving bespoke spreadsheets, making it hard to convince them about a better alternative.

There is also a lack of not only collaboration among leadership but also consensus on technology initiatives. Often the IT department pushes for investments in technology, suggesting the purchase of a third-party tool or the development of an in-house tool. But there is not necessarily enough focus on ensuring that the tool works for those who will use it across asset classes. 

Finally, choosing the right technology or product can be a big challenge, given that the market is flooded with portfolio monitoring products that claim to do it all. However, many third-party technology platforms are off-the-shelf solutions, while every private equity firm is unique. It is critical to ensure the best requirements-to-product fit, because if you make the wrong choice, you may spend two to three years on implementation and maintenance before realising that you need to pivot to new software. 

Moreover, constant data updates and validation for accuracy can be critical to the success of the technology/software implemented. In the past, firms have made material and long-term investments in multi-asset-class systems that they abandoned later, primarily because they failed to update data regularly. Given the challenges inherent in multiple systems, it is no surprise that 70% of respondents are open to adopting an integrated one-system tool.

One of the biggest challenges that private equity firms face is integrating multiple tools such as CRM, accounting, monitoring, reporting and ESG tools. How can managers integrate different data points to provide a single window of truth for both LPs and GPs?

It comes back to the practice whereby teams within private equity firms – such as accounting and administration, and portfolio monitoring – have historically followed their individual preferences driven by asset classes. You can find four to five data systems being used by different teams, which of course means there is no single source of truth. As a result, the lack of data management and coordination are the primary reasons for dissonance on existing systems as per half the respondents in the survey, followed by the preference for manual efforts, which multiply with multiple processes, compounding the challenges. 

Data needs to be consistent, starting with CRM systems, and then linked to investment systems, portfolio monitoring, accounting and reporting, including external reporting tools being used. But this is rarely the case. To get there, you need to either develop a single centralised system or create a bespoke system, connecting the systems with APIs or other technologies, while ensuring a single, centralised point of contact.

We serve as that centralised point of contact for private equity firms implementing new portfolio monitoring technologies. We can either collaborate with third parties (such as iLevel) or deploy our in-house product – FolioSure. Our technology team then works with the accounting and administration teams to install APIs so that all reporting originates from a central source, not a myriad of systems.

We term such initiatives as ‘data transformation projects’ – a process that many private equity firms are going through. Some have already made great strides on this journey. Others continue to struggle to create a centralised, single source of truth for the entire firm that can form the basis of both internal and external reporting.

RD: What is your opinion on generative AI adoption in private markets and what areas are particularly ripe for disruption?

Singh: Private equity firms are starting to cautiously adopt generative AI solutions. Most are using them to explore ways to improve efficiency in portfolio companies, while a few seek to drive value across the investment lifecycle. However, GenAI comes with a set of challenges that need to be addressed by experienced technology and information security professionals to successfully embrace and unlock the potential of this technology.

In portfolio monitoring, the first step involves the collection of validation data, which is then fed into a portfolio monitoring system. Extracting this data from board packs, reports and Excel-based models is time-consuming and complex, but AI can deliver significant efficiencies. Once the data is in place, analytics can be applied to support portfolio performance benchmarking, enabling firms to generate insights based on AI that they can incorporate into their decision-making.

RD: There is a perception that technology adoption takes time to deliver real benefits. What is a realistic timeline when it comes to successful implementations that deliver positive outcomes?

Singh: Innovation, whether it involves AI or other types of technology, will realistically take two to three years to reap rewards. Consider a global private markets asset manager looking to customise existing technology, which it uses in one asset class, for a different asset class. First, the firm will need to work with internal teams to decide how to access the fund and portfolio company data needed to glean the desired insights. Then, it will take at least a year to bed in the product, adapting it to meet individual preferences.

It is important to remember that technology adoption is a journey; it is not something that is ever complete, given the constant emergence of new disruptive technologies and the need for regular software upgrades. For example, generative AI has gained significant traction during the past 18 months but there is no clear path to implementation – it is a work in progress. 

Thus, it is important to stay updated with the latest technology available and keep exploring data transformation projects while continually keeping a tab on the quality of data and expected output. Constant tweaks and course corrections are required to reach a level of consistency and efficiency that can eventually have a tangible impact on your bottom line. 

RD: What is the latest trend in portfolio monitoring and the technology that supports it?

Singh: Increasingly, portfolio monitoring will also factor in the incorporation of ESG metrics. As per the survey mentioned above, only one-third of respondents suggested that they had mature ESG policies. The incidence of portfolio tracking is rising – three years ago, companies were in kick-off mode to track the ESG parameters of their portfolio companies. 

About 7% and 10% of firms were tracking 10-20% and 21-30% of their portfolio, respectively, in 2023. The share has now moved northwards to 16% and 13%, respectively. Considerable work needs to be done in this area around data collection; but in a very short time, the ability to sell assets and the ability to raise funds will be contingent on getting this right.

To meet all the requirements surrounding LP scrutiny and new levels of regulatory oversight, it is critical that private equity firms establish a centralised point of contact and a single source of truth across teams and investment strategies.

It is paramount to do so now because the stakes have never been higher. Firms are already being hit with multimillion-dollar fines for failure to comply with regulations, which are only becoming more stringent. The professionals in the sector are very well aware of this – in all three editions of our survey, more than 90% of respondents believed regulations would become more stringent. 

We believe investing in technology and engaging with strategic partners is key to managing the increasing expectations of investors and regulators.

This content was produced in association with Acuity - click here to find out more about Acuity on our Drawdown Service Provider Profile