2022-07-25
How Technology is Changing the Way Private Equity Firms Raise Capital
Today, private equity fund managers face an array of challenges in an increasingly competitive market. Not only are they tasked with finding the best possible investment opportunities and raising sufficient capital, but they also must generate returns that meet (and hopefully exceed) investor expectations. At the same time, their firms find themselves in the middle of a massive talent war characterized by the furious hiring of investment advisers and marketers that seek to raise capital from individual investors.
To be successful in this environment, these firms are tasked with keeping abreast of the constantly changing tides in the industry—from investor demands for digitized investment portals and processes to greater transparency and more efficient reporting—all without disrupting the core goal of managing the fund. In this realm, change happens fast and the technologies that firms employ must keep pace. The following overview explores how technology is changing the way private equity firms raise capital and more.
Changing Tides
While some private equity (PE) firms remain buoyed by legacy approaches and the notion that tenured, relationship-driven teams will always win the day, progressive firms have recognized the necessity of using new technology to help them raise capital and manage the investor lifecycle. Historically, most firm partners are primarily trained as deal-makers, not as managers and even less so as technology experts. That is why some private equity firms have been slow to invest in better platform technologies, especially when compared to hedge funds or some banks. It is not necessarily out of disinterest, but when it comes to raising money in an era where ‘free money has come to end,’ those who truly grasp how technology and automation can propel their firms have a significant competitive advantage.
Your Investors Expect You to Be Online
Today, investors expect PE firms to be online and tech savvy. They’re no longer comparing you just to other financial institutions; rather, they’re comparing your firm’s modernity and anticipated success to the broader app-ification of society. In essence, they seek the same experiences they encounter each day on their smartphone or laptop—investment experiences that are just as seamless as when they order an UBER or transfer money via Venmo. Simply stated, their patience for offline, traditional processes has waned. If your firm has not already realized this, then you’ve become a laggard in your fund raising efforts.
Remove Friction from the Outset of the Fund Raising Process
It logically follows, then, that investors expect a frictionless investment process that is characterized by streamlined, digitized approaches. Gone are the days when 100+ page private placement memorandums (PPMs) are printed and RIAs and institutional investors are educated through paper, leaving little-to-zero audit trails and endless eco waste. Now, fund profiles can be made available online 24/7 and they’re easily navigated, tracked, and audited for consumption through online platforms.
The Digitization of the Entire Investment Process
In fact, the digitization of the investment process can go far beyond just the issuance of PPMs and online education. Today, leading PE firms are increasingly digitizing the entire investment process—from onboarding investors to managing subscription documents, administering funds, reporting and compliance—effectively, this encompasses the lifecycle of the investor experience. Let’s review in greater detail where savings and operational efficiencies are realized through digitization:
Investor Onboarding: Traditionally, investor onboarding involved time-consuming, in-person meetings that often yielded NIGO (not in good order) errors. This is a rather demanding human capital endeavor. Today, however, smart PE firms have eliminated confusing paperwork and have moved the process online by offering user-friendly platform portals that enhance the visibility of where an investor is in the process, while concurrently reducing NIGO errors. The outcome: capital can be raised faster.
Executing Subscription Documents: Historically, subscription documents were printed and emailed to investors—an often time consuming process given the increased popularity and legal recognition of electronic (e-)signatures. Such an old school approach used to present an inherent data security risk that was occasionally characterized by postal and/or advisor delays. But, today, e-signatures are increasingly ubiquitous and allow subscription documents to become securely available to investors immediately via platforms, such as DocuSign, as well as the platforms that integrate with such applications.
Fund Administration: Like other legacy PE firm processes, fund administration interactions with fund administrators were traditionally offline. This entailed the emailing of documents and supporting IDs—a disintegrated, time consuming and error-prone process that often slowed fund raising. Today, however, progressive PE firms have accelerated fund raising by automating the transfer of subscription documents, IDs and other signed documents. They have further leveraged APIs to integrate transaction data, tax documents and funding notices, while concurrently, integrating Know Your Customer (KYC) and Anti Money Laundering (AML) checks for the fund administrator. What’s more, redemption requests can now be centrally managed and seamlessly passed via an online platform, which further enhances an investor’s experience.
Automated Investor Reporting and Compliance Management
Many PE firms understand that automated investor reporting and online compliance management is the future, but satisfying investor requests for financial data is one of the more difficult areas in which fund managers struggle to manage costs, and some fear that automation could sacrifice flexibility; thus, potentially decreasing investor satisfaction. This does not have to be the case. In fact, once you have completed fund raising, investor reporting and compliance management can be less costly and more efficient when executed via a single online platform, such as Asset Class. At the endof every month, PE firms are challenged to develop consolidated reports that bring together information from multiple companies within their portfolios. It can be a laborious process of harmonizing data from multiple sources to fit into a single, unified reporting framework. Today, however, a unified platform can ease the burden of this apparatus and give your team back valuable hours to dedicate to other initiatives.
Similarly, on the compliance management front, consider how legacy approaches are now being reformed. Historically, offline management interactions posed considerable risks, since PPMs could be easily copied for nefarious purposes, while at the same time email transfers represented considerable security and data protection risks (since they were seldom encrypted when transferred). Today, however, these processes are increasingly being brought online via a single platform, whereby all interactions are tracked and date/time-stamped with full reporting. Under this apparatus, broker dealer integration is easily supported for full visibility and gated content is subject to accreditation responses and suitability assessments. Ultimately, in such an environment, data security is paramount with encryption offered at every stage.
Hasten Your Digital Journey Now, Or Get Left Behind
As record inflation, rising interest rates and a slowdown in M&A activity creates new challenges for PE firms, the competition amongst them has become more heated than ever. The proportion of PE firms using new technology to raise capital and manage their portfolios will only continue to increase, and those that are unable to provide quality investor experiences with data insights will find it harder to attract and retain investors. Now more than ever, technology evaluation is a vital part of a PE firm’s operational due diligence and success, and the days of using inefficient offline (paper) processes, Excel spreadsheets, and other legacy approaches are all but gone if you wish to build a high-quality investor base.
While digital transformation may represent a significant operational change for your firm, new tech solutions can help you be more competitive in today’s digital-first landscape. While no fund administrator has posited a single, silver-bullet solution that will solve all of the industry’s pain points, progressive PE leaders that harness the power of a unified, feature-rich platform are best poised to rise above the competition.
Discover How Asset Class Can Help Your Team
Asset Class powers over 650 private capital funds around the world. Whether you’re a PE, venture capital firm, or a commercial lender, you can discover how our platforms help make the future of finance frictionless.
Schedule a demo with one of our team members today.
Sources:
https://www.assetclass.com/
https://www.wsj.com/articles/private-equity-firms-poach-talent-to-chase-wealthy-investors-11657017002
https://www.pionline.com/private-equity/private-equity-fundraising-deal-activity-facing-challenges
https://jtcamericas.com/why-technology-is-reshaping-the-private-equity-industry-and-how-nes-financial-can-help/
