PLACE FINANCIÈRE & MARCHÉS — Private Equity

CARTE BLANCHE

Technology: time to invest in how to invest


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Private Equity (PE) is known for driving change in the businesses it acquires. This change often comes in the form of technology applied to portfolio companies with the objective of improving efficiency or customers’ experience. But are PE and Venture Capital (VC) funds going digital themselves?

Covid-19’s confinement certainly drew many to virtual meeting rooms, digital signatures and remote board meetings which may become the new normal. Yet, to some extent, face-to-face meetings are privileged in such a relational and trust-based sector as was demonstrated in the recent IPEM conference earlier this month in Paris which gathered over 3.000 participants in the first large, international PE event under “Covid Check” rules.

But what about more structural digitalisation? Are fund managers leveraging technology for the benefit of their performance? Recent surveys from IQ-EQ in partnership with The Drawdown [1] and from Aztec [2]  claim they do. Technological engagement varies according to the type of business area (fund administration, accounting, investor relations, HR, compliance and reporting, ESG…) and the differences are striking. For instance, accounting and fund management software is adopted by 65% of respondents. On the other end, only 8% use a dedicated software for waterfall distribution. There is therefore a large spectrum of practices which, combined with outsourcing, show the way towards more dedicated tools in detriment of the – not so – good and flexible Excel sheet. Tools abound out there, especially when it comes to back and middle office needs.

Accounting and fund management software is adopted by 65% of respondents.
Luís Galveias

Luís Galveias,  COO,  Luxembourg Private Equity and Venture Capital Association

Things become trickier with deal sourcing, portfolio monitoring and investor relations. These remain very much considered as core functions of any PE/VC firm and require a certain standardisation which can be associated with larger players holding a strong market position.

One of the most interesting conclusions from these surveys highlights the increasing requirements from investors towards PE and the GPs. As more institutional investors gain exposure to the asset class, their need for data mimics the kind of information they are used to receive from more traditional equities. Although the asset class is fairly illiquid, it remains sensitive to overall market variables and investors like to know where their assets stand.

Next to investors, technology is mostly driven by regulation and the administrative – but necessary – burden it brings. The recent adoption of the Sustainable Finance Disclosure Regulation (SFDR) is a good example, illustrated by the diversity of ESG-related solutions coming as a response to the growing needs of managers to comply with the new rules.

Technology has always been associated with innovation and disruption. The recent “Bpifrance Entreprises 1 Fund” dedicated to retail – accepting investors from €5k on – has been so successful that a second fund is on its way. Two thirds of the fund subscribers made their first investment in Private Equity thanks to the technology tool put forward by B4Finance, a company specialised in digitalising the investment process.

Two thirds of the fund subscribers made their first investment in Private Equity thanks to the technology tool put forward by B4Finance.
Luís Galveias

Luís Galveias,  COO,  Luxembourg Private Equity and Venture Capital Association

In 2016 EQT launched its Motherbrain artificial intelligence (AI) tool to support deal sourcing to EQT Ventures and later also to EQT Growth. It “supports the tracking of company life-cycles rather than deal life-cycles, ending at a fund’s exit”. With a proven track record, it enables “EQT to make faster and more substantiated decisions”. Motherbrain’s AI can go even further and impact the sector and the economy at a larger scale by, for instance, being able to prioritise the research of female founded start-ups, something no other human controlled tool has yet been capable of doing.

What if on top of AI we also add blockchain to PE operations? I’m eager to discover the new tools this new 21st-century ledger system will bring but it will certainly come with swiftness, transparency… and hopefully lower running costs.

This is a complex world that requires dedicated advisory but as of today it requires above all inspiration and guidance. That has motivated the LPEA to focus our next Insights conference [ 3] on technology and how it is disrupting the PE/VC business model. It’s no longer enough to invest in technological firms. Now is the time to invest on how to invest in the future.

[1] The Tech Transformation Survey (September 2021)

[2] Conquering Complexity

[3] LPEA Insights, 28th October, Luxembourg