Technologies like Artificial Intelligence (AI), robotics and blockchain are increasingly impacting the way private capital firms operate. Clive Short, head of funds UK at Intertrust, shares his views on how the industry is adapting to disruptive technologies and how the private equity industry will evolve in future years.
How is technology impacting the way private equity firms and their fund service providers work?
There’s been a shift in demand for real-time data, allowing investors and managers to ‘slice and dice’ data they want to see as well as being able to view data performance. Going forward AI is likely to have a profound impact on reporting tools and the ability to carry out live reporting.
In early 2019, Intertrust released their research on disruptive technology in the financial services industry where 91% of private equity respondents said that AI will disrupt their sector within five years.This reflects growing levels of interest in using AI for handling large volumes of investor queries more efficiently. It also highlights a significant market shift in that there’s a need for service providers to keep pace and lead the way in becoming tech-enabled organisations.
How could blockchain have an impact on fund administrators?
Technologies like blockchain are already being widely adopted in the private capital sector due to it’s potential to improve operations, especially in back-end processes and due diligence. Blockchain will also play a significant part in simplifying regulatory reporting in areas like KYC, although much of this is in its infancy. With regards to impact on firms, understanding where the value-add is for organisations embracing technology innovations is vital. It’s important to know how technology unlocks value in business, whether it’s derived from bringing client-centric solutions to the forefront, creating insights and assessing credit-worthiness from multiple data sets. It’s also likely that operations roles will be dramatically changed by the likes of AI, robotics and blockchain and there’s a growing need for organisations to bring technology expertise on board to help guide business innovation.
As technology becomes more powerful, what is the role for people? How will humans interface with technology?
Technology will continue to develop, evolve and disrupt the market. However, the human touch is still hugely important and having human interaction is critical to the operation of a private equity fund. Whilst robotics are becoming ever smarter and technology is contributing to operational efficiencies, without strong personal relationships between managers, investors and service providers, it’s meaningless. The foundations of a successful business are built on relationships, trust and reliability and are often the decisive factor when organisations are choosing their service provider.
What other aspects of the private equity industry have changed over the last 20 years?
The private equity industry has seen a change in the need for transparency and accountability of the GP’s performance. Environmental, Social and Governance (ESG) in the alternatives industry is a key driver for more transparent investing. Investors are now consistently acknowledging opportunities in ESG-focused businesses and managers are either currently or expected to have developed their own ESG strategies to meet investor requirements. ESG can be seen to open doors to new ways of investing, however, it does add a layer of complexity for managers and their investment strategies, which historically would have been more prescriptive or straight forward. In addition, regulation, substance requirements and KYC have all evolved and demands increased. Managers have become more sophisticated and investments structures are becoming more complex than ever.
How are private equity managers preparing for Brexit with respects to where they domicile their funds?
With the market still experiencing a time of great uncertainty due to ongoing Brexit debates, the trend across the majority of asset classes in preparation for the UK’s exit from the EU is to structure their funds in either Luxembourg, the Channel Islands or the Cayman Islands. Brexit or no Brexit this trend will continue however London still remains crucial to financial services sector and Brexit will present opportunities, despite some challenges, for the UK. From a multi-jurisdictional manager perspective, the concern has been around regulation and international trade agreements. For example, many managers have moved their Alternative Investment Funds (AIFs) offshore in advance of Brexit, allowing a sub-delegation back to the UK domiciled manager to continue in their capacity as investment advisor to the Alternative Investment Fund Manager (AIFM). Whatever scenario plays out, Intertrust remains in a strong position to provide managers stability and confidence when it comes to structuring their funds or accessing other key investor jurisdictions with a global network across 30 key financial centres.
How will private equity evolve over the next 20 years?
There’s every expectation private equity will continue to
grow as investors seek to increase their allocation to private
capital and managers continue diversifying structurally,
geographically and by asset class. The private equity industry is
likely to see more regulation coming into place,
increasing data and transparency demands and more environmentally and socially responsible investing. Technology will continue to play a key part in the growth of private equity as there will need to be a move towards AI, machine learning and increased automation.
This article was first published in Real Deals 20th Edition Feature, published 17/10/2019, click here.
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