By A Paris – Private equity may have, historically, lagged the broader financial industry when it comes to the adoption of technology and automation. But as more data becomes available, reporting and transparency requirements on behalf of limited partners (LPs) ramp up and firms continue to diversify their investments, access to analytical tools and the expertise to use them is fast becoming a necessity.
“Technology has become, as we see in the industry and generally in our society, such a big part of pretty much every industry, including ours,” comments Mike Lo Parrino, EY Americas Financial Services Organization Private Equity Leader, in a webinar.
In view of the growing role of data and technology, industry commentators have highlighted the shifting role of the chief financial officer (CFO) within private equity firms. “Technology and innovation has now become essential, across the portfolio and industry in general. I believe data management is central… the CFO is becoming the custodian or the guardian of the most valuable asset within an organisation, which is data. That role is taking more responsibility around how to leverage that data and how to benefit the portfolio of companies,” outlines Tony Robinson, partner, Scottish Equity Partners (SEP), in a webinar hosted by the British Private Equity & Venture Capital Association.
Portfolio analytics and technology are the primary functions chief finance officers highlighted as needing to move from routine to strategic, according to the EY 2020 Global Private Equity Survey. According to the CFOs questioned, 70 per cent plan to increase the time they spend on portfolio analytics and 69 per cent want to increase the time they spend on technology.
Lo Parrino comments: “We’re already seeing the CFO role expanding. CFOs are leveraging technology and advisors to handle the routine back-office tasks. In the future, I think we’re going to continue to see CFOs think strategically, focusing on analysing that data for the business both at the private equity fund and the portfolio companies.”
“Deal and portfolio executives are becoming increasingly busy so CFOs are taking on more responsibility and evolving beyond finance into a number of areas. These include data protection and resilience, digital strategy and also an area close to my heart – ESG and responsible business practices,” details Robinson, “The role is much more operational now than it’s ever been. There is also interaction with the portfolio as well as with the organisation.”
In a report entitled Delivering Value from Data, Matt Aslett Research Director, Data, AI & Analytics, S&P Global underscores: “Data-driven decisionmaking has become a business imperative amid the fourth industrial revolution as data-driven pioneers have shown that the effective use of data can be leveraged to drive new opportunities, disrupt existing markets, and create competitive advantage.”
Gaining an edge
In Robinson’s view the main drivers behind this include an increase in demand for data from LPs as well as growth in assets under management and changing profiles of private equity firms: “The growth in fund sizes and expansion of portfolios in terms of both fund size and geographical locations have driven the need to embrace technology to cope with this. What we try and do at SEP is maximise our team’s efficiency and productivity as part of this. We are a technology investor so we should do as our companies do.”
An example of this is embodied by EQT Capital, a Swedish private equity firm. “Firms that can systematically capture and leverage data, not only external and performance data, but also human predictions, judgements and decisions, will be well positioned to achieve a future competitive advantage. We started this years ago, and we’re not slowing down,” the firm states.
In evidence of this belief, EQT is home to Motherbrain, a firm-wide platform which leverages data and machine learning for recommendations on new deals, add-on acquisitions, market analysis and industry trends. The original use-case was to algorithmically source deals for the firm’s Venture fund, but Motherbrain has since developed into a macro analysis motor for the whole firm.
The drive to maximise the benefits of technology is also being seen within the institutional investors themselves. “As sovereign wealth and pension funds get bigger, more complex and more competitive, their ability to harness technology is key. The quality, accessibility and analysis of data are taking centre stage, helping funds make better investment choices in today’s fast-moving global environment.
“Anything that makes funds better at picking the best investments among hundreds of opportunities is a huge competitive advantage. This is where data comes in,” highlights David Neuenhaus, KPMG global lead, asset management – tax, in a blog.
“Being agile is key,” Robinson stresses, “It’s crucial that the systems can adapt and cope with the pace of that data demand… At the core of what we do is add value to our portfolio, that’s our job. This adds a further dimension to the strategic priorities and the investment dimension.”
Shifting recruitment strategies
This increased focus on data, analytics and technology is leading to a change in hiring strategies and focus on behalf of PE firms. The EY study notes: “Building a workforce that has the relevant data analytics and information technology skills is increasingly necessary if the finance team is going to get the most out of its new digital investments. The traditional workforce of private equity is accustomed to Excel and firms need to train their people on the new systems as well as adjust the profiles of new candidates as the technology landscape continues to evolve.
“In order to see a larger return on their technology investments, CFOs have to motivate their team to use every functionality possible in the new systems.”
In fact, specialist recruitment firms are being set up to meet these staffing needs. Wyatt Partners, for example, specialises in data analytics recruitment. The firm says: “We are the only executive search firm specialising in data & analytics leadership recruitment. We use bleeding-edge technology combined with a rigorous data-driven search methodology to hire only the very best performers for our clients.”
Lo Parrino observes: “The skill sets required for the talent pool are much more technology-savvy, with much more data analytics experience. Our CFOs are speaking about how, in this competitive landscape of private equity, you’re not just competing against other private equity firms; you’re actually competing against other industries, such as technology. So you really have to be focused on attracting talent and retaining talent.”
He adds how on the retention side, CFOs have mentioned they’re changing some of the things they do at the firm to maintain retention. Office programmes, more open workspace, casual dress, remote access, working from home — a lot of these things are used to attract talent.
“Private equity CFOs increasingly recognise that they need to elevate the overall pool of talent within the firm, particularly as data analytics takes on a more important role in the organisation,” the EY study highlights.
David Alich, director, deal analytics and technology, PwC, discussed his view for the future in a recent panel discussion: “I expect to see further heavy investment in data and analytics technology solutions by PE firms and their portfolio companies. Every fund will have its own analytics and data experts or data science teams who work on PE internal value creation projects to implement analytics solutions directly into portfolio companies.”