Cutting edge through technology
A majority of LPs wants their GPs to make better use of technology in order to leverage its potential for cost cutting, suggesting that to remain competitive, firms need to reassess not simply their tech stack but how they are deploying it as well.
According to ‘The Cost of Playing the Game’, a survey conducted jointly by Brackendale Consulting and IQ-EQ, 53.1% of LP respondents saw investing into technology to be the preferential way for a GP to keep its costs down. Second and third place were the use of third-party fund administration and middle-office solutions, and non-specified ‘other’ responses, with 22.5% and 16.3% respectively.
To conduct their research, the two firms surveyed LPs from Europe, North America and Asia. According to the report, LPs contacted were pension funds, insurance companies, family offices and fund-of-funds.
“The key takeaway here should not be deploying more tech for the sake of it,” commented Justin Partington, group head for fund and asset managers at IQ-EQ. “But realising technology’s full potential in the private equity industry and increasing the access to data internally to further its visibility and further optimise investment portfolio returns.”
As the industry matures and regulation increases, so have GPs’ headcounts. However, only 2.0% of respondents to the survey see expansion of the back office as their preferred method of decreasing a PE firm’s costs. The percentage is identical for outsourcing compliance processes.
Fay Margo, Brackendale’s CEO, weighed in: “LPs want their GPs to focus on their core competence of closing good deals and creating value. From their point of view, a lean team structure heavily supported by technology represents a competitive advantage.”
The world is becoming increasingly technology-driven and private equity is no exception. What the survey shows is that when it comes to value creation, tech can play an active role in the creation of new products but equally constitute an advantage through cost reduction, resulting in increased attractiveness to LPs.