Technology is continuously transforming the way the private equity industry operates and the integration of tech-enabled tools has dramatically improved the investment journey.

Today, there are a plethora of different tech tools that enable private equity managers to strengthen their portfolio management. In a recent Real Deals webinar, industry experts discussed how best to access and operate tech-enabled portfolio monitoring strategies.

Indeed, tech tools enable private equity investors to monitor their portfolios more efficiently, make more informed decisions, standardise data, and integrate ESG into their reporting, to name a few. Here are some key points from the discussion:

Click here to listen to the full discussion

Decision making

IQ-EQ’s Hugh Stacey noted that there is now “a whole plethora of different tools to allow fund managers to maximise and utilise portfolio management. “Initially we saw tech concentrate on the performance of funds, then they wanted to drill down to the underlying company to get company metrics and we’ve since then seen things on the risk side, the accounting and even on the compliance side.”

While it is undeniable that PE investors tend to focus on performance first, the tools that follow enable managers to dig deeper into the fine detail. “PE usually looks at the performance monitoring first. And then it is like having an iPhone, you have one or two apps and then you start adding the apps to it and it’s exactly the same thing when it comes to technology for fund managers,” Stacey said.

Whatsmore, Binroy said, is that the introduction of modern technologies such as AI and machine learning have been pivotal for decision making in PE. The benefit of this, he said, is that “it takes out our human emotion to some extent and puts an art and a science together for how you make your decisions.”

In today’s crisis environment, tech tools are also being used to assist with managers’ stress testing of their assets. “With the current situation, every firm or investment entity has different investment objectives and quickly looking at that data on where you sit in your asset allocation, your exposure to different countries, your exposure to different sectors. Technology has enabled us to help medicate that risk to quickly understand how underlying investments are doing... what your risk exposures are and whether that ties into your investment objectives,” Parekh highlighted.

Stacey agreed: “With private markets, it’s much longer time horizons, so they may not divest out of a company, but they can do some what-if scenarios and stress test. If you’re a fund manager investing in the leisure and travel industry for example, and you want to see how Covid has impacted the portfolio; you might not be able to make any changes, but you can see going forward how that may have an effect in a few years’ time… Cash flow and cash flow forecasting has become very important in the recent crisis and technology have made this more efficient.”

In addition, where businesses have shifted their business models to survive the crisis, technology has enabled LPs to also keep track of these assets and be prepared for additional capital calls, Parekh said.

Standardisation

Where tech-enabled monitoring tools have also aided PE managers and their LPs are in standardising and streamlining data. “How a GP may calculate IRR versus how an LP thinks IRR should be calculated can have different perspectives. So, having that centralised and calculated [for GPs and their LPs alike,] is particularly important so that I can compare apples with apples,” Parekh said.

Stacey agreed that there are significant differences in expectations between fund managers and their investors and technology can be the first step to standardising information shared. “There’s no universal way of reporting although there are steps towards that. So I think technology is a great enabler,” he said.

Although, Stacey added, that these technologies cannot provide a complete picture of investment data on its own. “Technology is half of the offering, the other half is having people looking at that data, getting it consistent, ensuring it’s correct, is linked to the LPA, etc. so the fund manager can compare apples with apples.”

Looking forward, the speakers said that they expect tech-tools and human backing will lead to some form of standardised data in the industry, but this is likely to take some time.

Parekh said: “There will certainly be [standardisation] because as this particular industry streamlines towards sharing data, there is a heavier burden on GPs and LPs to share information and by doing so, we will see a change in thinking where certain data points become more and more common.

“There is going to be a streamlining of data and for certain types of investment, there will be a focus on certain types of data. If it is an ESG investment, for example, or if it’s a leveraged buyout or a credit fund, having different data points. There will be more streamlining with more investors asking for those data points...with the introduction of technology, GPs are grasping the fact that there is a need for more transparency on how particular investments are doing and quantitative data is the best way to link to qualitative data.”

Onboarding

Nonetheless, where some firms have already integrated their own tech-enabled portfolio monitoring tools, others are yet to begin capturing their data in this way. There are a plethora of tools available and so managers will need to make a decision based on their individual objectives, Stacey explained. “I think you have to take a step back and decide what is the objective of buying this software and who is it for. A lot of people rush into buying without considering this.”

Parekh shared the same opinion, “I want to make sure that my investment objectives are captured in this technology that we are going to adopt.”

Where big firms have built their own tech solutions, others will need professional assistance. Stacey warned that where many firms have thought to “go to a software provider, buy a software and implement it,” they could be making a significant mistake. “These are extremely powerful tools and if you don’t have someone who is techy in the organisation to be able to speak the same language as these tech providers, it is going to be very difficult to onboard these.”