Briefing: COVID-19 crisis shines light on private equity tech

Briefing: COVID-19 crisis shines light on private equity tech

It was five years ago that Partners Group’s disaster-recovery team began preparing for a crisis like the one that would shut down all but four of its 20 offices by the end of March.

● Lockdowns put buyout firms’ tech under strain

● Buyout industry’s rapid growth drives need for IT investment

● AI and Blockchain predicted to transform day-to-day business

Fortunately, Partners Group’s dedicated disaster unit, headed by chief technology officer Raymond Schnidrig, had carried out 11 simulations last year to prepare its 1,600-strong staff globally for a substantial disruption to business. It had even simulated a pandemic with social distancing and employees working from home.

As a result, the firm’s IT team has barely reported any difficulties since the start of the lockdowns caused by coronavirus internationally.

“When the Ebola virus hit quite heavily in Africa in 2015 we decided we wanted to have a pandemic framework in place,” says Schnidrig.

It involved using the firm’s standard business-continuity plans, adding more access points and redirecting virtual processing power in its disaster recovery centres. This would support more video conferencing usage and an increase in remote access load.

Globally, the private equity industry has a record $4.1trn of assets under management, according to data provider Preqin. This puts it under intense pressure to provide reassurance during the coronavirus outbreak.

Sam Metland, head of private equity product at fund administrator Citco, says the asset class is ramping up technology to cope. 

“A large client held video conference meetings for all underlying companies saying ‘this is what you should be doing about using video conferencing. Here’s the tech you should be using right now to help you communicate with your teams’,” Metland says.

Such tools have become popular during the lockdowns. For an industry based on relationships, the need to maintain face-to-face contact with portfolio companies, investors and staff has led to fast adoption of new systems that many private equity firms might have dismissed as unnecessary just weeks earlier.

“We’re seeing this virtual office concept and moving to the cloud facility of Office 365,” says Markel Alayev, director of service delivery at RFA, a technology services provider to the investment management industry. “We’re seeing three, four private equity firms a week activating Microsoft Teams.

“Lots of legacy business practices that depended on human-to-human interaction are going to be really put under stress.”

Mattias Hindfelt, chief technology officer at buyout firm EQT Partners, says the crisis has exposed weaknesses in many firms’ technology. “Multiple peers are now spending time training [staff] on how to work outside the office,” he says. “A challenge that may have arisen is a significant increase in employees using their VPN [virtual private network] due to servers locking down.”

For EQT – which began overhauling its IT systems five years ago – it is virtually businesses as usual.  º“We have had to transfer from 18 offices to 700 kitchen tables, that has been happening surprisingly smoothly,” says Olof Hernell, chief digital officer at EQT. “We have zero increase in the number of [IT] support cases. It’s basically more of the same, not only from emailing and communicating but from the back to front office.”

The firm is bolstering its video conference capabilities with four dedicated services. It is the kind of initiative Hindfelt says needs to be in the works before a substantial disruption like coronavirus.

“The hard thing to transform a company digitally is not the tech, it’s the behaviour, the ways of working,” he says. “If you start to do video conferencing at the same moment as a lockdown, that is harder than if you do that gradually over a couple of years.”

Private equity has made strides in updating its notoriously slow and outdated IT in recent years. In fact, Citco said in a white paper published in November, ‘Outperformance at Scale’, that the asset class was moving into a new era of maturity after 20 years of rapid growth. 

Technology – particularly systems for “smooth data flows and integrated, end-to-end processes, such as cloud, APIs [application programming interface] and online collaboration tools” – would be vital to its success.

Three key forces have led to the change: increased regulation putting pressure on reporting; more investor demand for information; and the need for buyout firms to improve efficiency in a hugely competitive deal market.

Hernell joined EQT five years ago to update its IT, initially with a remit to help just its portfolio companies. It soon became apparent the firm would need to ‘show the way’ with technology at EQT level so investee companies would see it as a trustworthy adviser.

EQT hired technology experts from leading software companies and “ripped out everything” before replacing legacy IT systems with “best of breed software”. The improvements have included enabling automation, using more shared services and tools from the cloud and a data warehouse to provide a centralised source for all information about a specific fund.

Hernell predicts that more firms will embark on similar changes when they return to the office after the worst of the coronavirus outbreak.

The industry should be aiming for higher quality data to enable executives to better access information at a moment’s notice and form the foundations for the most significant advances in technology, according to market participants.

The asset class is inching towards greater use of master data – a source of data beyond that required for investor reporting that general partners (GPs) can strategically manage from a single platform. It gives GPs and limited partners (LPs) easy access to all information relating to the firm to analyse and interpret as needed and save valuable time.

It offers great efficiency for buyout firms and investors but the breadth of information within it raises questions about competition, says a senior manager at a private equity firm, who suggested it could cause concern about investors beating buyout firms to deals.  

Artificial intelligence

Data access is paramount to maximising the potential of artificial intelligence (AI) and machine learning, which are among the technologies that promise the most extensive use among private equity firms and investors. 

A survey published in February 2019 by financial services company Intertrust Group showed more than 90% of respondents in the private equity industry saw that promise in the new technology, AI would have the biggest impact on the sector by 2024. 

“People will be able to take decisions, perform analysis or do benchmarking based on pre-validated information that is readily available and has been visualised through an automated process, reducing time on email as well as collecting and verifying the accuracy of information,” says Philippe Belche, a financial services consulting partner at advisory firm PwC.

AI is instrumental in deploying a cognitive search approach to private equity, says Samer Ballouk, head of alternatives product management at software provider eFront. “Information relevant for investment decision-making is often available in rich content, such as scanned documents or social media content. The computer-vision application of AI is usually employed to convert this content to a text readable by a machine.”

The extracted information enables firms to use this for the basis of machine-learning models that help identify investment rules.

EQT has been using AI with Motherbrain, a proprietary AI system it developed in-house, since 2016. EQT describes the technology as “leveraging big data and machine learning” to help its deal teams predict the next investment success. It tracks millions of companies a day to help the firm assess businesses faster and spend more time on the best targets sooner.

Private equity’s use of AI is in its early stages and firms should expect some growing pains. “The first time you do something like this, 20% of your valuations might be off or have a certain number of manual processes attached to it,” warns Kai Braun, a partner at PwC in Luxembourg. “The more you run this process, the more systems will learn and the more they will be correct.”

We could see growing popularity of Blockchain in private equity within three years, Tony Chung senior vice-president, group executive, private equity at software provider FIS. The cryptocurrency record system has clear applications in investor on-boarding, payments and self-authentication. 

Partners Group began using it more than two years ago and now uses it for registering investors for capital calls and distributions.

“Ultimately, every topic which is contract-related will at some point be impacted by blockchain,” predicts Braun, who says it has the potential to shake up the private equity services sector.

“In the future, we might see the transfer agent might no longer be necessary because the private equity firm can do the transaction directly with the investor,” he says. “In the same way, you might not need depositary banks in the future to verify the ownership of private equity in target companies. All that can be done in the blockchain.” 

Blockchain would need widespread take-up in private equity and a big proportion of the sector backing an industry standard to prove transformational and that could take at least five years, he adds. 

“Blockchain is still ways away from maturing to where it needs to be to be really implemented,” says Alayev. “If you’re not seeing it being implemented in investment banking, media or consumer, you’re not seeing it trickle down to smaller financial services firms.”

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