By Charlotte Light, Chief Technology Officer at the Aztec Group
As featured in LPEA Insight/ Out magazine #19, September 2021.
A survey sent out to fund managers draws the key issues when it comes to meeting client demands for data, and how technology is shaping the future of fund operations.
In Aztec Group’s recent survey of Europe’s private equity CFOs and CEOs, 98% said that the need for new technology, and more efficient operational solutions, was being driven by investors. To drill deeper into this, we followed up with several CFOs to find out how technology is reshaping their operations, and transforming the relationship between General Partners (GPs) and Limited Partners (LPs):
Investor demands for data have increased
One indisputable fact recognised by the CFOs we spoke to is that investor demand for data has increased significantly. LPs expect more data to help them make better investment decisions and to enable them to act nimbly in response to fast-changing market conditions. While part of this demand has been led by regulatory requirements, GPs believe they are now expected to provide LPs with just as much information on illiquid asset classes as is available from more easily traded assets such as equities and fixed income. As one CFO told us: “Alternative investments such as private equity used to have more room to manoeuvre, by their nature of ‘being different’. But now, with increased levels of allocation into alternatives in the last two or three years – particularly from institutional investors – that need for information has sharpened”.
The drive towards standardisation is still some way off
For most CFOs, concerns over reporting centre on requirements such as the Sustainable Financial Disclosure Regulations (SFDR) and environment, social and governance (ESG). One CFO called this “not just a hot topic, but life changing”. Unfortunately, the industry is still some way off standardisation, especially when compared with other asset classes. As a result, technology must be used by fund managers to overcome that lack of standardisation and deal with ever-increasing demand.
There’s been an unequivocal move towards standardised reporting within the private equity sector. For example, Invest Europe’s Investor Reporting Guidelines demonstrate a commitment to transparency and set out best practice for reporting to investors, while the Institutional Limited Partners Association (ILPA) is dedicated to promoting transparency and aligning the interests of LPs and GPs. While these initiatives are an encouraging step forward, they’re not yet embedded across the industry, nor do they fully reflect the increasing needs of investors for standardised reporting.
For CFOs, the drive towards standardisation appears something of a double-edged sword. On one hand, it’s seen as the key to ensuring the industry can operate on a level playing field, and regulation is increasingly driving the requirement for standardisation. On the other hand, it can be challenging for firms to gather data from different sources and present it in a bespoke way to different clients. Most clients still expect to see quite specific, and sometimes quite nuanced, reporting represented in tailored ways for their consumption. These investors are often coming from a very standardised world – and that level of large-scale standardisation can be difficult for smaller fund managers to deliver, but as one CFO told us: “Investors are expecting the same amount of information on a look-through basis from private equity firms as they would expect to get elsewhere”.
Fund managers need to manage their own data correctly
CFOs have also been telling us that one of the most crucial aspects is having their data stored in the right way. Many are discussing building data warehouses on top of existing systems, and having a real time view of their data. Some sectors of the investment market are more data-driven than others, but all firms recognise it’s essential to have the right systems and tools to extract data and use it to carry out rigorous, accurate analysis.
Fund administration resources can help deliver significant benefits
As fund administrators operating across various jurisdictions, we have seen increased demand from clients for self-service data solutions, bespoke dashboards and portal access, as opposed to the provision of bespoke reports. There’s always likely to be an element of tailored reporting required for investors so, from our perspective, it’s about being able to accommodate this bespoke service and information, in ways that still make commercial and operational sense for the investment manager.
AI and automation has huge potential
Financial reporting is a particular priority for CFOs. And, from an administrative perspective, it would be a welcome move if the industry could move on from the current regime of ‘guidelines’ to more stringent controls and instructions in how financial reporting data should be represented. Automation can undoubtedly help to create greater efficiency, particularly when processing large volumes of information. However, firms must recognise that internally, automation may not always be welcomed with open arms, particularly in such a people-driven industry. It’s therefore important to demonstrate automation is not about getting by with fewer employees, but about ensuring people spend more of their time on crucial value-add tasks, such as managing client relationships, rather than handling reams of data.
A time of opportunity
In many ways, private equity is at an inflexion point where data has become a precious commodity. How firms use technology to capture that data, and share it with clients, is going to become increasingly important. Those that embrace the challenge, both in satisfying client needs and uncovering unique insights, will have a clear competitive advantage.