A closer look at Digitisation in Private Markets
Insights

A closer look at Digitisation in Private Markets

9th November 2020

Following on from our first blog, we are sharing a series of articles based on our recent piece of thought-leadership research – ‘Digitising Private Markets’. Our second blog takes a closer look at the growing demand for private markets and how digitisation is playing a crucial role in giving investors greater access to unlisted opportunities.

It is only in recent years that the majority of financial institutions have acknowledged the importance of adapting their strategies in order to allocate to private markets. With investors placing far greater emphasis on achieving consistent and significant returns while limiting their exposure in volatile markets, financial institutions have been forced to adapt their

business model to satisfy the demand from their high net worth clients. A failure to do so could risk the loss of these clients (and their assets under management) to competitors who have taken a more proactive approach to private markets.

Why have firms been slow to react to the demand for private markets?

For some institutions, private markets are still seen as a niche investment opportunity. When coupled with the fact that they are also associated with unique regulatory complexities, it is perhaps unsurprising that firms were reluctant to enter a market that would result in operational challenges.

There have traditionally been three main barriers that have prevented financial institutions from expanding their offering to include private markets:

  • The need to streamline their operational processes to deliver access to private investment opportunities efficiently and profitably.
  • Having to establish robust governance frameworks to meet the regulatory requirements associated with private investments.
  • Scaling the private markets offering to a level that offers clients choice whilst also generating sufficient revenue to impact their bottom line.

Digitisation of private markets lags behind

In our recent research, 86% of financial institutions said that technology plays a fundamental role in their overall service delivery model. However, only 68% said that digital tools were used to deliver their private markets-related services. This highlights that whilst technology has been used as a business growth tool for a large proportion of firms in general terms, its use to deliver their private markets offering lags behind significantly. 

The slow adoption of private markets technology by many firms mirrors the speed with which they have moved to meet clients’ growing appetite for this type of investment opportunity. David Newman, Co-Founder and Chief Commercial Officer at Delio, explains that while businesses are slowly beginning to realise that offering access to private markets needs to be a fundamental part of a holistic wealth management strategy.

“Many of these firms are reacting to client demand and have been caught on the back foot in terms of their proposition development”, says Newman. “As a result, they are running their programmes with a short-term view that drains resources from their business – predominantly, well-paid staff doing jobs that could be automated and enhanced through technology.”

In short, many businesses are finding a quick-fix to adapt their offerings but in the long-term, these solutions are not scalable due to their lack of automation, reliability and effectiveness. Even before we were hit by the global Covid-19 pandemic, it was evident that digital transformation within financial services was a consistent and important trend. The events of 2020 have done nothing but accelerate this process, with digital tools being rolled out at a pace that has never been seen before. 

Where will technology have the greatest impact on private market operations?

Today’s investors are unlike the generation before; they often operate internationally, are time poor and are juggling multiple personal and professional obligations. They need to be able to manage their financial business at their own convenience, at a push of a button. 

However, their desire for tech-enabled solutions should not come at the cost of the traditional client-adviser relationship, which is still necessary and important in building trust and personalising service delivery. Instead, it is more about a mindset and attitude-shift from financial institutions to view the use of technology as a means of supplementing and enhancing their client engagement strategy.

As part of our research, we asked a variety of institutions to select the three areas of their business in which they felt technology would have the greatest impact. The responses were diverse and supported the view that digitisation has far-reaching benefits; however, three key strands emerged consistently. 

Increased operational efficiency

4 out of 5 institutions surveyed stated that technology would have the greatest impact on their business processes and operational efficiency. It is fair to assume that the complex requirements of a private market investment mean that this is where the greatest benefit of all could be seen. The use of digital tools to automate processes that have traditionally been managed by staff will remove a drain on an organisation’s human resources, save time and reduce the risk of human error that could lead to regulatory non-compliance.

Improved regulatory and governance processes 

In our 2019 report on Private Markets in Wealth Management, we revealed that 65% of firms felt that achieving full regulatory compliance was the main obstacle to them launching a private markets proposition. 

In our most recent research report, Gareth Morgan, Delio’s Chief Operating Officer and former Global Chief Risk Officer of HSBC’s Private Wealth Solutions stated that:

“A firm’s governance of its private markets offering cannot be considered on a standalone basis. Instead, regulatory compliance needs to be fully integrated within a firm’s business model and operational processes given that it will impact all aspects of a private markets proposition. Technology can support each stage of this process, adding control mechanisms to ensure that key tasks are completed, approved and recorded, significantly reducing the risk of non-compliant actions going undetected.”

Enhanced and more effective client experience and engagement

Some of the key improvements that digitisation can make to improve investor relations and client engagement come from providing them with 24/7 online access to investment opportunities, improved communication and rapid information exchange.

Despite some concerns from relationship managers that technology is a threat to the traditional way of doing business via in-person meetings, there is undoubtedly room for digital tools to supplement the work of advisers and enhance both client experience and engagement. For example, digitisation can speed up investment decisions and ensure that financial institutions are having the right conversations at the right time. In this instance, technology acts as an enabler for advisers, rather than replacing the important role that they play. Whether clients are accessing private investment opportunities on an advisory or introduction only basis, their adviser will still play a significant role in educating their clients on the appropriateness of the opportunity.

 

Our research highlights that there’s still a significant amount of potential for technology to improve the way that financial institutions deliver services within the private markets sector. And despite the concerns of the few, there is undoubtedly a place for both long-standing human relationships to exist alongside a digitised service offering. 

Our next blog concludes our series on Digitisation in Private Markets, with a focus on how Covid-19 has influenced tech-based decision making. But if you can’t wait until then, be sure to check out the full report to get an in-depth look at the research in full.

Download the report