5 Mistakes Private Equity Firms Make When Adopting Technology

Today, virtually every private equity firm finds itself in the throes of technological transformation. While private equity may still seem to be a rather conservative, relationship-driven industry rooted in the financial expertise of deal teams, there is no doubt that innovation is playing an even greater role in how private equity (PE) firms optimize their approach to investing.

This is primarily because PE firms now have access to an array of new software solutions and data streams that can enhance their investment relationships and decisions. The leading PE firms of tomorrow will be those who harness the power of data, automation and new technologies to inform all of their most important decisions. However, there are no cookie cutter approaches to success when adopting new technology in this sector. To help firms on their path to digital evolution, this article identifies five key mistakes they should avoid when adopting technology.

Mistake #1: Failing to (Simply) Prioritize Digitization

While it may seem like common sense for PE firms to keep up with advancements in digital technologies, some firms still hesitate to embrace them. This is often due to firm leadership counting too much on existing relationships and legacy systems—all while resting on their laurels following years of deal-frenzy. Of course, gone are the days of free money or negative interest rates that helped bolster such an environment … the days when "whatever the cost" didn't seem to cost that much.

The continuation of emerging risks—inflation, rising interest rates, geopolitical tumult, increased government scrutiny—has contributed to a slowdown in PE deals and heightened volatility. In this realm, one of the most common mistakes firms make is that their pace of digital transformation is simply too slow. In virtually every industry, it’s well-known that digital transformation is an incredible source of competitive advantage. Therefore, every leading PE firm should keep a pulse on the progress of digital evolution, or simply get left behind.

This isn’t the first time that firms have been warned about being late to the party. In fact, in 2017, an Ernst & Young report emphasized the importance of PE firms avoiding a “Kodak moment”—a reference to the era when Kodak lost market relevance due to its inability to adapt to new (digital) technologies.

Just as Kodak was slow to realize that the advent of the digital camera was game-changing in the 1980s, today it may be easy for firms to subscribe to the notion that their current tech stacks are sufficient. However, smart PE firms continue to challenge the status quo and continually keep abreast of the evolving technologies that can serve them. From a unified, single platform to manage a firm’s fund, investors and workforce, to the latest advances in artificial intelligence, automation and data analysis, it has become critical to monitor not only how these technologies can be leveraged in-house by your firm, but how they affect your portfolio companies, too. 

Ultimately, demoing new solutions and keeping up with advancements in the digital space will help you find the best deals, strengthen investor relationships, increase operational efficiencies, and create unique selling points.

Mistake #2: Over Reliance on Legacy Systems

All too often, PE firms find themselves caught in legacy technology traps—a range of problems that arise when a firm uses outdated technology to run its business. Using outdated software solutions and other technologies can create headaches in several ways:  you may discover that some on-premise software is no longer supported, you may learn that upgrades cost more than anticipated, and the use of outdated systems often result in missed data mining opportunities that would otherwise be realized.

Unfortunately, legacy systems just don’t give PE firm managers the flexibility to evolve in terms of new technology, big data and artificial intelligence. From a pure data perspective, the drawbacks in legacy systems are a significant burden because:

• Having data flow from different sources and stored in various locations makes it difficult to monitor and control investor relationships, fund administration, regulatory compliance and more

• It’s hard to understand how funds are performing without a single source of (data) truth

• The use of legacy systems can result in a lack of data analysis that would offer a firm a chance at better investment decisions.

Increasingly in our data-driven world, all systems are connected through the data channel. Therefore, your firm has a choice: continually spend more money on evolving your legacy systems or switch to a cloud-native, single platform that helps manage your firm’s funds, portfolio companies, investors and workforce.

Mistake #3: Failing to Harness the Power of Data and Automation

As alluded to above, harnessing the power of data insights is now the gold standard in private equity. Firms have more data at their fingertips than ever before. Naturally, they want the ability to evaluate it, monetize it (where applicable), and give their own value-added reports to investors and regulators.

With everyone seeking different forms of data for different objectives, the lack of standardized systems may seem problematic. An increasingly popular solution, however, is the shift towards selecting a unified platform with an intuitive dashboard that enables easy access, in a secure manner, to all data that is sought.

Often, PE firm leaders are too busy dealing with their day job of raising capital to drill down on data insights. But, when you work with a single platform provider with a professional services team, your firm doesn’t necessarily need to worry about the resource overhead and complications surrounding the extraction of value from data. Conceivably, a platform’s professional services team can take care of everything—from system build, to data migration and analysis, automation and more.

A platform that can analyze a firm’s data and yield actionable insights will serve as a powerful connection and valuation tool—not only for the deal origination team but potentially for your investor relations team, as well.

That’s because data is essential when it comes to sharing information with your investors and telling a story in a meaningful way. Historically, investors could wait months to get information. But, when your platform harnesses the power of data, it improves efficiency, accuracy and dependability of data sharing. What’s more, that information can be made available to your investors more quickly in order to minimize the inbound questions that your firm may receive from them.

Smart PE firms are further harnessing the power of automation because intelligent automation and advanced analytics are key tools for enhancing business processes. These technologies can also serve your broader goals, such as greater transparency into performance, reduction of error-prone manual processes, and the creation of an engine to analyze your data for more effective decision-making.

It’s likely that there are more repetitive tasks in your firm then you’d like to admit. Thankfully, the right PE platform, in conjunction with its professional services team, can seek out burdensome repetitive tasks in your apparatus and automate them, which allows your team to focus on the jobs they do best. Here’s a few examples of how automation becomes increasing appealing to PE firms:

• Automating the completion and execution of subscription documents with pre-populated fields based on investor onboarding responses and the subsequent use of e-signatures (i.e. via DocuSign)

• Automated transfers of subscription records, IDs and signed documents, as well as integrating directly with a fund administrator for KYC/AML checks

• Automation and corresponding analytics can help performance management teams identify opportunities to boost the value of portfolio companies by streamlining, modernizing, and reducing costs in their finance operations

• Automation can lend greater visibility into the transactions taking place at each portfolio company, equipping private equity CFOs and performance management teams with insights  that can help shape decisions at the fund management level

• Automating compliance management so that all interactions are tracked, dated and time-stamped with full reporting.
   

Mistake #4: Choosing a Solution That Doesn’t Offer Robust Integrations

As platform technology has evolved, it has brought PE firms an incredible opportunity to integrate systems. Leading firms have realized that gone are the days when you manage your firm and investor relationships in a spreadsheet, while using disparate software tools. Instead, today, you need robust application program interface (API) integrations between your deal tracking platform and/or CRM, your portfolio management platform, and the reporting software that will satisfy complex regulatory considerations.

Having a single, unified platform that addresses all of these challenges, offers enhanced investor relationship management and the ability to pull data from multiple systems to deliver accurate reporting to regulators (and investors) is not only in great demand, but it’s increasingly imperative.

The very best PE platform technologies integrate with thousands of the world's most popular software applications. From Salesforce to Dropbox or Box, to your accounting and marketing software, it is essential that the technology that you choose to run your firm is able to thrive in the API economy.

Mistake #5: Not Taking Cybersecurity Seriously Enough

PE firms face an array of risk management factors as they adopt new technology. At the helm is cybersecurity. Inadequate cybersecurity at a firm can turn promising investments and funds into a source of risk quite rapidly. While some firms consider some sort of cyberattack or data intrusion inevitable, such a view is short-sighted.

Instead, when adopting new technology, they should begin with the foundational question:  “does the technology that I’m about to adopt have bank-grade security?” When selecting a platform technology, your firm should choose a solution that is SOC II-compliant, which is the same level of security that your bank is required to have. You should further ensure that your chosen solution holds data in the same geography where you conduct business, so you can rest easy knowing that your data (and your investors data) is secure. Finally, all data, including the transfer of documents and PII (personally identifiable information) should be encrypted at every stage.

Summing it Up: Your Imperative to Choose the Right Technology Solutions

The private equity industry has undergone remarkable transformation in recent years and the next era of the industry will be redefined by the technology solutions that PE firms choose. Your firm, regardless of its size, needs the ability to manage relationships, transactions, processes, workflows, and the compliance of the firm in a very data-centric, automated and secure manner. Accordingly, you should select purpose-built technology that’s easily configured to meet your firm’s unique needs. With increased competition in the market, it can be more difficult than ever for PE firm leaders to grasp just how much markets are shifting each day with the advent of new technologies. Since technological evolution will have a serious impact on your firm’s ability to achieve long-term success, taking heed of what mistakes to avoid can make all the difference.

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Need help choosing the right technology solution(s) for your firm? Asset Class platforms power over 400 private capital funds around the world. Whether you’re a PE or venture capital firm, you can discover how our platforms help make the future of finance frictionless. Schedule a demo with one of our team members today.