3 Ways Emerging Technology is Disrupting Private Investments

In the face of this ever-evolving pandemic, it is increasingly clear that technology and digitalization are here to stay — fully woven into the fabric of just about every part of our society from politics to education and, of course, the financial industry.

Markets are making shifts to continue operating amidst another Covid-19 variant, Omicron; Wall Street fell into a frenzy on Black Friday as stocks fell. The DOW dropped 2.5% alongside the S&P 500, tumbling to 2.3% (the lowest day since February). US equities were also down, and with the new cases debuting in Africa, Hong Kong, and Israel, flight bans are back on the agenda.

Private equity (PE), typically a more traditional sector of the investment space, has been no exception to the growing technology imperative. As a result, private equity has become quite the darling of alternative investments. The increased attention it’s received has spawned perhaps more accelerated adoption of technology and attention to disruption than we may have seen otherwise in this sector.

We’ve explored three key ways that emerging technology has disrupted private markets and how it’s likely to play out in the near future. (Speaking of disruption: learn how a seven-person research team at a massive fund of funds firm supports the group’s opportunistic business through a fully customizable structure of alerting.)

1. Digital Disruption Becomes a Key Factor in PE Investment Decisions

When we think about digital disruption and emerging technology related to private equity, our minds often go to how they impact firms internally, such as new organizational structures or increased internal process automation. While those things are indeed happening (and we’ll get to them shortly), technology’s most significant impact right now on PE firms is on investment decisions.

Digital disruption and transformation are happening in every industry for every type of company. This means that private equity firms must consider how these factors will impact potential targets in the near future. Specifically, they need to understand how technology could act as an opportunity or threat to an investment’s eventual exit value.

It’s also necessary to understand where potential investment targets live on the digital maturity spectrum. The expectation and level of importance for this may vary depending on the industry where said target operates. Existing portfolio companies, too, need to be evaluated and advised accordingly to maintain competitiveness related to technology capabilities.

This, of course, is more complex than simply adding “emerging technologies” or “digital maturity” to a list of portfolio evaluation criteria. PE fund managers, research teams, individual asset advisors — the people in all of these roles and more must be trained and provided with the resources they need to understand how these concepts are relevant and impactful. Digitization and process automation streamline workflows and remove significant friction in the functioning of portfolio evaluation criteria.

In some pockets of private equity that have always been tech-focused — venture capital, for example — incorporating disruption potential and tech capabilities into decision making is likely not a complex undertaking. However, in more traditional sectors, such as real estate or LBOs, it represents a significant shift.

As the pandemic rages on and the potential for new variants rises daily, portfolio evaluation criteria need to include how digital transformation is being used to evolve alongside global market-impacting events.

2. Emerging Technologies Alter Private Market Operations

Private equity investment decisions rely heavily on data, and thanks to advancing technologies over the past decade, they now have access to unprecedented volumes. It’s no secret that large PE firms face increasing competition with data democratization igniting the explosion in competition. Emerging technologies, then, have been adopted mainly by PE firms for access to vast amounts of data to make strategically impactful decisions.

AI has been the biggest contributor to this end, transforming data from its traditional descriptive form into the market and investment forecasts.

“One of the attractive things about AI is its ability to power predictive analytics,” SEI senior VP Jay Cipriano recently shared with Private Equity International. “Predictive insights powered by machine learning could prove to be transformative for many firms, leading to better decisions across a range of functions. For example, predictive insights, especially in the age of Covid-19, help get ahead of potential investment-impacting events.

Efficiency improvements have been another place where PE firms see disruption and find themselves required to make adjustments to stay competitive. For example, traditional profit and loss statements managed in Excel sheets no longer cut it. Instead, firms must now find ways to incorporate more sophisticated platforms powered by rapidly emerging cloud technologies into everyday operations like valuation assessments and customer relationships.

An exciting aspect of these technologies, too, is their ability to level the PE playing field. Smaller firms can now invest in the right technologies and access the same amount of data speed and scale as larger corporate firms. Without the requirement of substantial full-time teams to handle data operations, the PE playing field has the potential to get a lot more competitive.

3. Leadership Teams at PE Firms Evolve to Keep Up

Combine new strategic requirements related to investment decision-making with emerging technologies impacting day-to-day operations, and PE firms should be thinking about ways to expand their technology leadership and expertise. And for the most part, they have.

Recent research surveying 101 private equity senior-level executives found that 93% feel their firm’s top IT executives are becoming more critical to their business, and 85% see the CTO specifically as essential to driving their business forward.

Chief Technology Officers and Chief Digital Officers are seeing their roles expanded across the financial services industry and private equity. Firms are overwhelmingly indicating that they know the importance of these roles. That includes hiring if it isn’t built into their current leadership team.

Takeaways

• Private equity firms leverage emerging technologies, especially AI (Artificial Intelligence), to strategically harness vast amounts of data to make intelligent investment decisions.
• As transparency increases and private markets become less private,  AI becomes more critical. New sources of structured and unstructured data regularly crop up and are combined with machine-learning technology. As a result, AI offers the promise of insights that were unimaginable only a few years ago.
• While two-thirds of firms expressed confidence that they are prepared to address cybersecurity risks, cybersecurity budget findings indicate that increased spending is necessary to keep pace with the growing threat landscape. In short, PE has a strong interest in digital transformation across the board.

To get ahead of the competition and know how to prepare for these new technologies, we partnered with HSBC and their award-winning analysts on an exclusive virtual series covering emerging disruptors across the finance, energy, industry, and technology sectors: The Edge of Disruption. Watch the four-part webcast series now.