Technology has been crucial in allowing the private equity industry to keep operating through lockdown. A panel of experts joined Real Deals and IQ-EQ to discuss how managers and advisers have been using technology.

SPEAKERS:

Justin Partington, Head of Funds, IQ-EQ

Neel Mehta, Chief Financial Officer, DWS

Rajen Shah, Finance Director, 17Capital

Barnaby Piggott, Chief Executive, Holland Mountain

Hugh Stacey, Investor Solutions Executive Director, IQ-EQ

Private equity has always been an industry where you have to “press the flesh” if you are to be successful. This is one reason why it hasn’t always been the fastest to digitalise and automate. But as the asset class has globalised and the Covid-19 pandemic has placed restrictions on travel and personal interaction, the shift towards digitalisation within PE has accelerated.

In a webinar hosted by Real Deals and IQ-EQ, a panel of experts discussed how the use of technology in private equity has evolved and asked whether the Covid-19 lockdown will mark a long-term shift in the way the asset class operates in the future. Here are some of the highlights from the discussion:

Raising and closing funds remotely?

As lockdowns have taken hold, managers and investors have turned to technology and conference call platforms to maintain relationships and complete processes launched prior to Covid-19, IQ-EQ’s head of funds Justin Partington said. New deals, bolt-on acquisitions and fundraisings, however, are not “getting off the ground without that initial personal contact”.

“Our clients are using technology to continue processes, but technology is not quite enough to replace the building of relationships for the first time,” Partington said. “Where we have seen clients do a follow on fund or a new side fund, it is less likely that they will get that away without a significant number of reups from existing investors they know. There is the prospect of starting smaller with a cornerstone investment from previous relationships and then expand once the situation returns a bit closer to normal. That might mean that instead of a 12-18 month period to final close, we might start to see 24-36 months to final close.”

Partington added, however, that creative solutions like virtual investor intros, had begun to emerge to facilitate introductions and initial, informal interaction.

How organisations have responded to Covid-19 operationally:

Neel Mehta, CFO at DWS, said all organisations have had to rapidly invoke business continuity procedures, and that technology “has been crucial for keeping the wheels turning”. Mehta said his focus had been on establishing what procedures and platforms were the most secure when it came to sharing and viewing sensitive data.

Sustaining key relationships with management teams, investors and other stakeholders have been another priority.

“Audio and video conferencing have become crucial for maintaining key relationships. It is the new normal. We have had a number of sessions with LPs around the existing portfolio and the risks and impacts of Covid,” Mehta said.

Hugh Stacey, IQ-EQ’s executive director of investor solutions, said that pre-Covid the institutionalisation of the LP-GP relationship had already prompted a number of managers to start using technology more proactively to improve the quality and frequency of investor communication and reporting. The Covid-19 pandemic has accelerated this process, with managers going a step further and opening up their own internal reporting platforms directly to investors.

“The current situation has been a catalyst, but this is a long-term trend that isn’t going to go away. How managers report, and the frequency of reporting, will change, and a big part of that is down to technology,” Stacey said.

Understanding the risks:

The role technology has played, and will continue to play, in facilitating interaction in the asset class does not come without risks. Rajen Shah, finance director of 17Capital, said cybersecurity was a fundamental pillar of any effective technology strategy.

“All managers should be aware of the risk of increasing cyber attacks. Remote working does pose operational challenges,” Shah said. “How are staff accessing data in a secure way, and what types of communication technologies are they using? How are staff communicating with each other and outside the organisation? Good cybersecurity is not just about the IT firm that looks after you. It is about making sure that it is everyone’s job. Any data breach doesn’t just affect productivity. It can also lead to lawsuits and fines. The risk of not implementing a solid cybersecurity plan is just too high.”

AI and data analytics: not there yet

Although there is potential for GPs to use technology for front office functions like origination or deal execution, Barnaby Piggott, the chief executive of Holland Mountain, said the industry wasn’t there yet.

“AI, data analytics, and machine learning are running before you can walk. Before the Covid-19 crisis, a number of firms were resistant to using technology tools like Teams, Zoom, and Slack. There was minimal uptake in the front office and another area that was weak in the front office was controlled workflow and document management. Covid-19 has forced the way investment teams operate to change,” Piggott said. “But a huge amount of data still is in spreadsheets and word documents. You aren’t going to be able to do very good analytics or leverage machine learning while everything is in documents, spreadsheets, and people’s email inboxes. There is a long way to go before investment teams are set up properly and storing data properly.”

Some firms have tried to combine data from their CRMs with other data platforms, but “something meaningful” has yet to emerge at this early stage, Piggott said.

To listen to the webinar, please follow this link