The role of technology in scaling private markets

The role of technology in scaling private markets

28th April 2022

As private markets continue to scale, one thing has become increasingly clear: not only are more financial institutions turning to alternative assets, but those that have, are growing their focus exponentially. Yet, as shown in McKinsey’s Global Private Markets Review 2022, scaling has brought new levels of operational complexity. As a result, firms that are looking to establish themselves at the forefront of the sector are trying to overcome this challenge by digitising their strategy.

Without the right tools, not everyone benefits from economies of scale

According to the report, private markets AUM have grown by 19% annually since 2016, with specialist firms increasing in size by 60% in size over the same period. The drivers behind the growth of private markets are frequently touched upon; increased investor demand, more promising returns, and a chance to diversify investor portfolios. With this in mind, it is not surprising that scale is on many institutions’ agendas. However, while most industries see the benefits of scaling through improved operational efficiency, in private markets it adds a new level of complexity that needs to be proactively managed.

“Increased operational complexity – driven by additional asset classes and geographies, more fund vehicles and separate accounts, and a larger and more diverse set of limited partners (each with a growing set of bespoke reporting demands) – has mitigated the extent to which large GPs benefit from scale economies.”

McKinsey Global Private Markets Review 2022

One way of overcoming this complexity is through digitisation. While private markets remain primarily in the infancy stage of digital maturity, there is a notable shift in technology adoption  as a small number of leaders are allocating more resources to digitise and stay at the forefront:

  • Multi-strategy fund managers (>$10bn AUM) tend to invest $1m- $5m on third-party solutions each year.
  • Focused investment in automation and data solutions will pay off for those early players. According to McKinsey, companies could save firms between 4-7% in AUM while increasing productivity by 15%.

Digital tools that drive efficiency

Automating repetitive tasks has been a critical driver for digital tools. It not only helps speed up the investment process but also frees up substantial time that can be better used elsewhere. Simultaneously, online portals enable LPs to create a better client experience that offers investors more active control. Among the solutions that early players turn to, are:

  • Data warehouses to share and manage all documents in one digital hub, serving as a single source of the truth for professionals.
  • Real-time analytics from which professionals can generate data-led insights.
  • Automated data input processes, such as geospatial analyses, allow professionals to concentrate on higher-value analyses and more intricate parts of the due diligence process.
  • Natural language processing tools enable professionals to capture information on the performance of their portfolio companies. This ultimately leads to faster reporting.

David Newman, chief commercial officer at Delio added:

“Next to automation, we also see a growing need for customisation among our clients in the private markets space. By implementing technology that complements and enhances their existing processes, financial professionals can free up their own time, work more efficiently and offer a more targeted client experience.”

Getting the basics right

While technology offers many solutions, digitally-led projects still require a lot of input to ensure they deliver against their objectives. McKinsey identified a few key learnings which emphasised that anyone who wants their digital strategy to thrive needs to get the basics right. This means clearly articulating what you hope to achieve through digitisation, as well as considering the different use cases and their implications.

Gareth Lewis, Delio’s chief executive, agrees:

“One of the main pitfalls facing firms is often investing in technology blindly and hoping that it will solve all operational complexities. Companies need to have a thorough understanding of what they would like to achieve in the short- and long-term to make the best use of the digital solutions available.

After all, digitising your private markets offering will trickle into your wider business operations. To take a holistic approach to digitisation, it needs to be seen as a wider operational shift and requires early buy-in from decision-makers.”

It is important to note that digitisation alone is not a ‘silver bullet’ for financial institutions looking to scale their private market offering. While increasing their digital maturity is a major step in the right direction, significant care and consideration needs to be given to how digital tools are integrated into existing business models, or used to enhance them. Yet, when managed effectively, technology has the potential to offer financial institutions a significant advantage as they offer clients greater access to alternative assets.

Download the full report