Technology plays a key role as private equity enjoys a record year post-pandemic
Private equity managers have had a frenetic 12 months. From the depths of the pandemic, the industry has staged a remarkable rebound, eagerly hunting down deals as firms rush to spend dry powder.
With more than USD580 billion in deals announced in the first half, 2021 is on track to be a record-breaking year – the first ever in which private equity firms deploy in excess of USD1 trillion in capital, according to figures from EY.
So how have evolving technology trends been affecting the industry?
Jacob Zornes of UMB Fund Services has a better perspective than most. With decades of experience in the sector, UMB has over 160 clients spread across hedge funds and private equity. The firm services over 1,000 funds with a total of over USD128 billion in assets under administration and offers a full private equity fund accounting system.
Technology offers an edge
Zornes believes private equity managers are ready to embrace new technology, which can help give them an edge over the competition and allow them to cope with the growing volume and tempo of deals they are working on.
Typically, private equity firms use software for three main functions, he explains. These include a system that manages deal flow, a separate portfolio company reporting system and a fund accounting system, he says.
The first is used to track communication back and forth in every potential deal that a firm is looking at.
“It’s their deal pipeline, how many deals are underway and what’s being funnelled through,” says Zornes. “With private investment, due diligence requires drilling down into the particulars. It is necessary to maintain all the communication and contacts, and track throughput.”
The second piece of software is an analytical tool that can be integrated directly into a firm’s accounting system to help ensure portfolio managers and investors can access all of the information they desire at any time – and satisfy regulatory requirements where necessary.
“A private equity manager needs to be able to easily collect performance metrics from their portfolio companies on a regular cadence,” says Zornes.
“A portfolio tracking system will facilitate the collection of KPIs (revenue, operating expenses, EBITDA, FTEs, or any other metric) from the underlying portfolio companies. A strong system will allow you to easily extract these metrics from the database, ultimately empowering analysts to monitor the progress of the portfolio.
“The lynchpin is the fund accounting system, which should be able to integrate with both the deal flow and the portfolio tracking system. This integration is key because it allows private equity managers to get a holistic picture of what’s being reported,” Zornes comments.
Selecting a fund accounting system
So, what should private equity managers be thinking about when they select a fund accounting system? Zornes says the first priority is that it must truly meet their business needs given their portfolio construct, investor base, and business requirements. That means, it needs to be able to track and report on the specific data points that matter most. Second, it must be able to produce the consolidated reporting needed to manage a fund and keep investors up to date.
Mistakes can be expensive and time consuming to rectify so it’s vital to make the right decisions. After all, there are significant costs of time and money for a PE manager that selects the wrong fund accounting system, or one that is not specifically designed for private equity, especially if they don’t have the in-house knowledge to make it work.
Growing market offers wider choice
Either way, on both counts, Zornes thinks the range of software that is now available to firms has become wider and increasingly sophisticated, offering new and better tools.
“More and more players are entering the marketplace,” he says. “There used to only be one or two software vendors out there. Now we are seeing new market entrants from the fintech space who are saying: ‘We can do this better’.”
He says the days of private equity firms using spreadsheets to manage all of the information about their portfolio companies is coming to an end as executives realise there are better systems available.
“What they are starting to recognise is that spreadsheets, while great analytical tools, are not necessarily a database,” he says.
“But they’ve been treating spreadsheets like a databases for many years, and so they have all that historical data stored. Now they’re finding that the maintenance of that data is costly and time consuming, so they need to migrate that information into a portfolio tracking system.”
Delay can pose a risk
Zornes says the risk with this spreadsheet-based approach is that firms may wait too long to make the transition to a new system.
“Don’t wait for that moment when you realise: ‘I’ve got too much risk with all my data in spreadsheets and I’ve got to fix this’. Don’t wait for it to become a problem: proactively look for a software solution that will meet your short-term and long-term needs.”
Postponing the decision can store up extra trouble for your organisation, he says.
“Because when you wait, you are not only dealing with migration costs, but also with an internal team who may be resistant to change because they’ve been using spreadsheets for so long they’ve gotten used to it.”
“All of a sudden, you have a migration project on your hands, and your staff may be reluctant to undertaking such a large project. Don’t postpone this decision because you’re worried about costs. You should do it now.”
After all, the range of technology services now available to private equity firms is growing all the time. Some software firms now offer private equity firms a full-service offering where they will actually contact a firm’s portfolio companies on their behalf and collect the data they need.
“On the other side of the spectrum, is software where the fund manager manages that process. They can automate the communication to a portfolio company and customise the metrics that they’re trying to collect. The manager is in complete control.”
Zornes says another key trend has been private equity firms seeking to encourage their portfolio companies to make better use of technology to become more efficient and profitable.
“If you can implement the right technology, you may be able to be a significant industry disrupter. The private equity industry is moving towards a technology focus at a great pace, and innovation is going to rule the day in a market that is becoming more and more competitive,” he concludes.