The Evolution Of Money

The Tech's Factor: The Digitalization Of Private Markets In 2022 And Beyond

The pandemic encouraged large firms to enhance technological capacity and smaller firms to capitalize on a first-mover advantage

New Bite Investments report reveals high expectations for digital growth in the private capital industry. Download the report here.

LONDON, May 23, 2022 /PRNewswire/ — Bite Investments released a report in association with Mergermarket concluding that enhanced data access and operational efficiencies are the main drivers for digitalization among investment firms. The report, titled “The Tech’s Factor: The digitalization of private markets in 2022 and beyond,” reveals how digitalization is shaping the private capital industry and how fund managers are adopting to tech, for what purposes and how the size of a firm can be a determining factor in speed, success, and satisfaction.

The report surveyed US senior executives from middle market, boutique funds, and asset managers on the topic of digitalization of the private markets. The research revealed that it is crucial to be ahead of the game when it comes to digital adoption. 90% of firms with AUM of more than US$1bn agree that keeping ahead of the game in regard to technological capabilities at their organization is a top priority.

“Investors are arguably the most important part of the private capital ecosystem. Therefore, catering to their desires and demands is an absolute priority for alternative asset managers. Digital adoption is needed to help enhance this client onboarding,” said William Rudebeck, CEO, Bite Investments.

“There are great expectations for digital growth. We found that big firms are much further along in terms of digital adoption and how this will be applied to their value chains. This means that smaller firms can still capitalize on a first-mover advantage among peers,” said John West, Managing Editor EMEA at Mergermarket.

“The pandemic has been a catalyst for digital adoption in the private capital industry. But regardless of what happens with Covid-19, the realized benefits of this change are here to stay. We are not going back to the old ways of doing business,” Rudebeck added.

The report demonstrates what a digital future would look like for the private markets industry. Key findings include:

  • External digital investments are expected to increase. Over three-quarters (80%) of larger firms expect to make external digital investments (e.g., to advisors and services providers) north of US$1m, with 33% anticipating investments of between US$5m and US$10m. Smaller firms with AUM of less than $1bn expect to make commensurately smaller investments into external digital investments.
  • Portfolio/fund management and analysis, and investor profiles ranked first as firms’ top digital priorities. Larger firms also identified that digitalization investments will improve investor onboarding, relationship management and communication whereas smaller firms listed due diligence as a top business function to digitalize.
  • Cloud/Software-as-a-Service (SaaS) will have the largest impact on how private equity firms operate over the next ten years. For this reason, increased investment in cloud/SaaS solutions are deemed necessary to improve operations. A majority of firms are expecting to invest further into areas in which they have already made progress and investments. These include cloud/SaaS solutions (78%–80%) and social media, mobile and collaborative digital technologies (75%–83%). The primary benefit of using cloud/SaaS platforms is to streamline operations.
  • Third party service providers are used for a wide variety of services. The size of the company often dictates the services needed and prioritized. For instance, 81% of larger firms use a specialist third party software service provider for their due diligence. However, smaller firms are more likely than larger ones to say they currently use third parties for their portfolio/fund management, analysis, and investor profiles.
  • Operational efficiencies will be the single most important long-term effect of digitalization. Operational efficiencies at the portfolio company level are essential to a private capital firm’s value creation playbook. Other long-term benefits respondents most commonly expect from their digital investments include access to enhanced quality and quantities of data (78% of all respondents). Digitalization projects will not succeed without good, clean data.

“These insights reaffirm that as digitization accelerates, fund managers will have to adapt to continuous tech evolution. Our mission at Bite Investments opens possibilities in alternative investment markets with digitization, and a new forward-thinking approach, enabling firms to configure their own digital platform to improve the experience for existing and prospective investors and limited partners,” Rudebeck concluded.

The Roadmap for a Digital Future

The future is digital. That much we know. The more important questions are: what will a digital future look like for the private capital markets industry and who will the winners be?

Key Findings:

1.) Larger firms are looking to invest more in digitalization. The majority of larger firms expect to invest at least US$1 million in digitalization in the next two years. Less so for smaller firms.

2.) In terms of business functions that respondent organizations flag as top priorities, large firms are focused on
client/investor onboarding while smaller ones are more concerned about due diligence – exploring the type of due
diligence or how they want to change due diligence.

3.) In terms of investment, most larger firms say this is most needed to help enhance client/investor onboarding (a top three priority). Interestingly, client/investor onboarding came fourth place in the list of priorities for smaller firms, with due diligence being an area most in need of digital investment for a majority

The pandemic has been a catalyst for digital adoption in the private capital industry. But regardless of what happens with Covid-19, the realized benefits of this change are here to stay. We are not going back to the old ways of doing business...

4.) To improve their operations, a majority of firms are expecting to increase investment in cloud/software-as-a-service (SaaS) solutions, social media/mobile/collaborative digital technologies, and/or cybersecurity/data protection.

5.) Firms use third parties for a wide variety of services, but the size can dictate the service. For instance, 81% of larger firms use a specialist third-party software service provider for their due diligence, while only 48% of smaller firms say the same. However, smaller firms are more likely than larger ones to say they currently use a specialist third-party
software service provider for their portfolio/fund management and analysis, and investor profiles.

6.) Operational efficiencies will be the single most important long-term effect of the planned increase in digitalization.

7.) When respondents are asked to pick which technology they think is going to have the most impact on how private equity firms operate over the next ten years, the top answer was cloud/SaaS solutions.

Expectations for Digital Growth

Digitalization has undoubtedly progressed in private capital markets over the past two years, but what does the future hold? Our research reveals, much like the present, that larger firms are in the lead, with a more bullish attitude toward ongoing digital investment. Almost half of this group (48%) expect digitalization investment to increase by 25%–50% over the next two years compared to the last two years. A further 15% anticipate an even higher percentage increase in investment of at least 50%.

Smaller firms, on the other hand, generally either expect the level of investment in digitalization at their organizations to stay roughly the same (45%) or increase only moderately – 38% of respondents expect the level of investment in digitalization over the next two years to increase by less than 25%.

When it comes to the amount they are willing to spend to achieve those future ambitions, larger firms are generally out in front once again.

Five Steps to a Digital Success

The private capital management industry of old is no longer fit for purpose. As digitalization accelerates, sweeping across industries, fund managers will have to continuously adapt. Those taking a proactive, intelligent approach to improving and doing so ahead of their competition will see the biggest gains.

For those that have not yet fully embarked on this journey, it is necessary that they carry out end-to-end reviews of their operations and look for ways to improve data capture and management, migrate from sub-optimal legacy systems and enhance the quality of services provided to their valued investors.

With this in mind, we draw from our own experience and the insights gleaned from this research to offer five takeaways:

1.) Time to move on. The pandemic has been a catalyst for digital adoption in the private capital industry. But regardless
of what happens with COVID-19, the realized benefits of this change are here to stay. We are not going back to the old ways of doing business.

2.) Take the plunge…now. Larger investment firms are taking the lead, while smaller firms have been slower to adopt digitalization. That will soon change and there is a huge first-mover advantage for smaller firms to capitalize upon right now if they take action before their competition.

3.) Keep it simple. If you can. Investment into technology need not be costly or require extensive training. It is possible to move to a simple, end-to-end secure investor-facing system that streamlines your client onboarding and automates the entire investment cycle, from client suitability and targeted distribution through to subscription and consolidated reporting, in a fully automated and customizable way.

4.) Spread the net wide. For institutional investors, private capital strategies already make up a large percentage of their portfolios. However, there are vast untapped pools of capital among wealth managers, high-net-worth individuals, and other investor types. Technology is democratizing access to private asset classes, opening up channels to these previously overlooked sources of capital.

5.) Know your tech. There are numerous technologies that fund managers can adopt to improve their operations and deliver cost efficiencies, from cloud/SaaS solutions to data analytics. As financial markets weigh up the potential of distributed ledger technology, private markets are set to benefit from this rapidly emerging technology. The same is true of AI, which is in its earliest stages of adoption. In the future, expect investor documentation and drawdown/distribution records to migrate to the blockchain, while AI will increasingly be used for sourcing and filtering new deal opportunities in a more automated and systematic way

 

 

 

Methodology
In Q4 2021, Acuris Studios, on behalf of Bite Investments, surveyed 80 senior executives from middle market, boutique funds and asset managers based in the US on the topic of digitalization of the private markets. Forty respondents were from firms with Assets Under Management (AUM) of US$1 billion or more and 40 respondents were from firms with AUM of less than US$1 billion.
About Bite Investments
Bite Investments is a financial technology company created to expand access to alternative investments. The company’s enterprise solution helps fund managers utilize a digital platform to streamline their client’s diligence, compliance, distribution, client onboarding, and investor relations processes and workflows. Bite’s investment solutions bring alternative investments out of the institutional market, making them accessible to a larger audience. Bite Investments is a fintech company led by an international team with extensive experience in alternative investments, financial services, and technology. Bite has offices and customers in Asia, Europe, and North America. Learn more at https://www.biteinvestments.com.