LANTERN THE PROMISE OF TOMORROW: PRIVATE EQUITY AND TECHNOLOGY

Transcription

1 INSIGHT REPORT LANTERN THE PROMISE OF TOMORROW: PRIVATE EQUITY AND TECHNOLOGY

2 1 The Promise of Tomorrow: Private Equity and Technology Executive summary We asked 305 private equity professionals from around the world consisting of general partners (GPs), limited partners (LPs), fund administrators and service providers about their present use of technology, their thoughts on future impacts and trends, and how working practices and business models in the industry are expected to change in the near future. The survey was supplemented by qualitative interviews with industry experts (see the appendix for more details). The data reveals that the industry is broadly optimistic about the prospect of technological innovation, with particular interest in the cloud, automation, outsourcing and investments in the customer experience and market expansion. Such plans coincide with changes in the private equity business model and a more competitive market that are making it critical for GPs in particular to offer a more personalized, more accessible and more accountable customer experience. At the same time, firms must also increase internal efficiencies to make them more responsive to their customers and regulators. 70% of respondents see a major role for cloud-based solutions in their business. However, a number of challenges must be overcome if private equity is to make the most of the exciting technological changes sweeping the financial services industry. Firms that embrace this world of innovative technologies are likely to be the ones that win out in the marketplace. 74% of respondents expect technology to enhance their competitiveness.

3 The Promise of Tomorrow: Private Equity and Technology 2 Highlights The industry understands the opportunities created by technology. Some 74 percent of respondents expect technology to enhance their competitiveness. Hopes for technology to deliver operational and strategic benefits are high. Above all, industry participants expect technology to improve their productivity or agility, with 66 percent of those surveyed anticipating the most impact on their business in one of these two areas. Private equity professionals say they are already exploring a wide variety of technologies, notably cloud-based solutions (78 percent), data integration (72 percent), mobile solutions (68 percent), and more sophisticated business intelligence and analytics (67 percent). More networked, interoperable systems could ease the drudgery of data collection and free up higher value analytical capacity. Some 80 percent of those who took our survey think technology could make regulatory compliance easier by automating data aggregation, reporting, auditing or tracking. Private equity is in the dark ages when it comes to technology Respondents are almost unanimous in their desire for more universal data standards to help drive innovation. Over 85 percent think data standards could unlock more efficient ways of working and sharing information, resulting in gains such as improved portfolio visibility. A majority (61 percent) see the need for an independent organization to set and oversee industry-wide data standards. New technologies promise a transformation in working practices and business models. Nearly 70 percent of those who took our survey identify investment in customers and markets as a priority over the next few years. Many are looking to the cloud and big data technologies to achieve their goals. They envisage cloud-based enhancements in data processing, data privacy, cybersecurity and automation, and they see big data as helping them to improve and diversify the customer experience they offer. A large-scale shift to distributed, networked platforms in the cloud could facilitate further use of outsourced solutions, and 54 percent of respondents plan to outsource their back-office operations by The survey also reveals substantial, although lesser, interest in outsourcing front- and middle-office functions. Data processing and automation rank as the most important areas of technological innovation in our survey jointly accounting for 44 percent of responses on this topic. This underlines the perception that private equity professionals add more value by analyzing financial information than they do by simply collecting it. ALLISON PIET, DIRECTOR OF ALTERNATIVE INVESTMENTS ACCOUNTING & REPORTING WITH INSURER METLIFE.

4 3 The Promise of Tomorrow: Private Equity and Technology Key findings A technological turning point As the industry absorbs multiple forms of technological innovation and regulatory change, private equity is on the cusp of a major turning point in the way it operates. These new technologies promise to transform the data that is available to GPs and LPs and make it easier to comply with regulations and automate repetitive tasks so that professionals can focus on their core strengths and add value to their portfolios. Technology already plays a critical role in private equity firms strategies, and it will continue to do so in the future. For an industry commonly seen as less than tech-savvy, our respondents were overwhelmingly optimistic about techdriven innovation, with 74 percent seeing technology as a means of enhancing their competitiveness (see Figure 1). Industry participants are seeking to simplify complex systems and data processes as they strive to satisfy clients expectations particularly in respect of transparency and software functionality. They clearly hope to get more out of their data and to spend less time and energy on the nuts and bolts of gathering, validating and formatting data. Above all, they expect technology to improve their productivity or agility, with 66 percent of those surveyed expecting the most impact on their business in one of these two areas (see Figure 2). Figure 1. Do you think your company is: THREATENED BY TECHNOLOGY? 26% MADE MORE COMPETITIVE BY TECHNOLOGY? 74% NOTE: ALL DATA IS SOURCED FROM A JULY 2016 SURVEY BY LANTERN INSIGHTS. Figure 2. How can technology provide the largest impact within your business? More productivity 41% 26% 17% 8% 8% More agility 25% 18% 17% 21% 19% More automation 17% 23% 22% 17% 21% More informed decision-making 11% 15% 21% 26% 27% More standardization 6% 18% 22% 28% 25% Rank 1 Rank 2 Rank 3 Rank 4 Rank 5

5 The Promise of Tomorrow: Private Equity and Technology 4 Modernizing from the dark ages Much as our survey respondents are invested in tech-driven innovation, private equity has remained behind the technology curve in comparison with certain parts of the financial services industry. Private equity is in the dark ages when it comes to technology, says Allison Piet, director of Alternative Investments Accounting & Reporting with insurer MetLife. There are GPs who have a lot of different systems because they use one system to do their waterfall calculation, other systems to do capital account statements, and other systems to maintain bank information. Two particular causes of the industry s uneven path to modernization stand out. One is the simple fact that private equity is naturally less data-intensive than some other market segments, particularly those that process massive amounts of real-time market data, such as high-frequency trading. The diverse and illiquid nature of many private equity portfolios reduces the incentive to invest in highly integrated real-time systems and makes the standardization implicit in such systems harder to achieve. The other is that many firms still rely on Excel to process, manipulate and analyze data. I have spoken to LPs who are still doing their accounting in spreadsheets, says Piet. However, it can result in data processes that are laborintensive and error-prone. And the industry is being driven towards modernity. There is widespread recognition that to remain competitive, industry participants must move more of their operations to the latest online platforms that combine scalability, flexibility and interoperability. Excel is so critical to everything we do, says Christine Campney, senior manager, Investment Finance, Private Investments for the Canada Pension Plan Investment Board (CPPIB), but there is a trend to try to move critical functions and really important processes away from Excel and into systems where they belong to reduce the risk of errors. In addition to the issue of risk, increased client expectations of technology are putting pressure on the status quo. Tony Chung, global head of product management and strategy, private equity at FIS, elaborates: When investors undertake due diligence on a fund manager, especially regarding newer or smaller fund managers, providing an answer that they do everything in Excel is probably just not good enough anymore. The answer is that you need to have a known established platform to manage the operations or you outsource to a third party, but one of those options has to be in play. Simplifying complexity Respondents recognize that technology can help them simplify the complexity that they currently face. In particular, they would like assistance with managing multiple portfolios and investors, visualizing and sharing information, and performing interconnected business functions. At present, many of the legacy technologies relied upon by GPs and LPs clearly struggle with the complexity associated with their core tasks. This is where the clever use of modern technologies could help simplify, integrate, and automate data and processes in a quick and reliable fashion. Executives say technological innovation in relation to these areas is particularly important. By far the highest percentage (28 percent) identify data processes as a priority, followed by automation with 16 percent (see Figure 3). Figure 3. Which area of technological innovation within private equity is most important to you? Data processing 28% Automation Cyber security Data privacy 15% 15% 16% Dealflow (e.g. business operations) 12% Regulation 9% Workflow (e.g. human operations) 5%

6 5 The Promise of Tomorrow: Private Equity and Technology Data standards: The great enabler The first step in driving innovation is to standardize how the industry handles data at least to the extent that the composition of private equity portfolios permits. Modern technologies incorporating industry-wide standards could make it easier for financial data to be shared and re-used by others, while technologies such as application program interfaces (APIs) could connect different computer systems, automate prescribed tasks without human intervention, and make specialist skills and services available online anywhere and at any time. I think the biggest innovation that could happen in private equity is some type of standardization, says FIS Chung. This is not easy to achieve, because by nature private equity is not standard, but in as much as we can standardize, that would benefit the community. Certainly, our respondents are almost unanimous in welcoming the prospect of more universal data standards, with 86 percent seeing this as an enabling factor for innovation (see Figure 4). Figure 4. Do you think data standardization could help to drive innovation? NO 14% YES 86% Interviewees link several specific potential innovations to the adoption of data standards, including the creation of objective private equity fund performance benchmarks and the development of deal-room technology to facilitate the sharing of sensitive information during due diligence. But the most obvious benefit is simply that GPs, LPs and other parties could quickly and efficiently compare similar metrics. The ideal state for an LP is to be able to consume data across any number of GPs and to know that these data points mean the same thing, so they know their consolidated remaining commitment across all of their GPs. According to our survey, 41 percent of respondents think data standards could help most with the visibility of corporate financial information (see Figure 5). Easier management of investor organizations and contacts ranks second with 25 percent, followed by fund information with 19 percent. The need for more consistent, interoperable data systems, supported by centralized standards, also reflects a broader evolution in financial markets. Once a relatively niche area, private equity is now becoming more widely accepted as an alternative asset class. The need to integrate private equity investments with other asset classes is therefore increasing. Private equity is increasingly becoming a standard part of the asset allocation portfolio, says Chung of FIS. So how do you deal with the private element of a portfolio when it doesn t have the same kind of metrics and data points as publicly traded assets? Figure 5. Within which areas of private equity would data standards help you the most Company financials/underlying portfolio companies 41% Investor organizations and contacts 25% Fund information 19% Cash flows 9% Capital accounts 6%

7 The Promise of Tomorrow: Private Equity and Technology 6 in theory, but not yet in practice In theory, standards should make it easier to efficiently share financial data and increase interoperability between systems. Yet data standards have struggled to become established in the marketplace. Why is this the case, and what is missing? Some of the obstacles include lack of awareness, a lack of willingness to cooperate and a lack of interest. This is illustrated in Figure 6. Our interviewees suggest that in practice, GPs proprietorial attitudes towards data a reluctance to give up their secret sauce are a contributing factor. Private equity historically has been very careful about what it shares so that no one can copy their revenuegenerating model, says Christine Campney of the CPPIB. How do you deal with the private element of a portfolio when it doesn t have the same kind of metrics and data points as publicly traded assets? TONY CHUNG, GLOBAL HEAD OF PRODUCT MANAGEMENT AND STRATEGY, PRIVATE EQUITY AT FIS Figure 6. What do you think is preventing the creation of industry-wide data standards? Lack of awareness 37% Lack of willingness to co-operate 21% Lack of interest 16% Cost Lack of need Lack of technology 9% 9% 9% But what is fundamentally needed is leadership. I think almost everyone would like more standardization, but almost no one has an idea about how we might achieve it, says Tim Hames, director general of the British Private Equity and Venture Capital Association (BVCA). Chung of FIS agrees that the industry faces challenges. There s little prospect of industry-wide agreement on what fields of information are important. Where direction on standards should come from is a moot point, however. By some accounts, the responsibility lies with the largest LPs, whose continuing pressure on GPs to provide transparency over fees and portfolio performance seems the most obvious driving factor for data standards. By the same token, GPs could use data standards as a means to stay ahead in an ever more competitive landscape, for example, by implementing protocols that facilitate the sharing of information with clients, whether via investor portals or other software functionality. Overall, given conflicting interests within the industry whether between GPs or LPs or between competing firms the best hope for progress is the establishment of an independent organization to set and regulate standards for the industry as a whole. According to our survey, 61 percent of respondents consider such an organization necessary (see Figure 7). At the same time, a substantial element of pragmatism is in evidence: a not-insignificant 33 percent of respondents think progress is more likely if the industry settles for standards that are less ambitious in scope. Figure 7. What do you think is necessary to drive industry-wide data standards? An independent organization Smaller scope of data standards 33% 61% Other 7%

8 7 The Promise of Tomorrow: Private Equity and Technology Automation: Relieving the burden As we have seen, the interaction between technology and data is viewed as critically important by private equity firms. But with competitive pressures abounding, new technology also simply offers a way to save money and work more efficiently. Private equity professionals say they want to spend less time assembling data so that they can devote more energy to analyzing or acting on it. According to Chung of FIS, When the LP receives information from the fund manager, he should be able to literally review it and press a couple of buttons or feed right into a system so that the LP is not spending time re-entering data, normalizing information, trying to figure out what it means. Instead, the focus is on the performance of the fund manager. For many, all this means automating processes to make them less labor-intensive. We process probably 1,200 capital account statements every quarter and two or three thousand capital calls a year; not having to key that information in [manually] adds up, says Piet of MetLife. Automation holds particular promise in terms of easing burdensome compliance procedures. As Divyesh Mahajan, chief technology officer of Abu Dhabi Financial Group (ADFG) explains, In the future we will see a lot of automation and artificial intelligence coming into play, both in the lawyers and auditors space. Those two spaces are incredibly important for private equity. However, compliance is complicated by the fact that one GP may serve many different LPs, with potentially several layers of corporate structure and associated governance for each portfolio holding. So it comes as no surprise that in relation to regulatory compliance, 25 percent identify data collection/aggregation as the prime target for more automated processes, followed by reporting, auditing and tracking (see Figure 8). The consensus is that as automation improves and becomes more established, it could revolutionize industry processes, but that there is still some way to go before this is a reality. Says Campney of the CPPIB: I envision a day when GPs drop a file, we pick it up and I press the button, it goes right into our data platform and perhaps we do one level of approval or something like that. But because of the way we receive information today, we probably have several layers of approval just to make sure that we haven t missed anything. Automation and artificial intelligence are incredibly important for private equity. DIVYESH MAHAJAN, CHIEF TECHNOLOGY OFFICER OF ABU DHABI FINANCIAL GROUP (ADFG) Figure 8. In which areas could technology most help your business with regulatory compliance? Automating data collection/aggregation 25% Automating reporting 24% Automating auditing 20% Automating tracking 12% More efficient decision-making 11% Gathering more data 9%

9 The Promise of Tomorrow: Private Equity and Technology 8 Figure 9. Which technologies are your business currently exploring? Cloud APIs/Data integration Mobile Analytics/Business intelligence Basic communication tools Encryption Excel enhancements Self-hosted solutions Blockchain 78% 22% 72% 28% 68% 32% 67% 33% 63% 37% 62% 38% 49% 52% 44% 44% 36% 64% Yes No The rise of the cloud Based on the survey, the industry is already exploring and embracing a wide range of new technologies. The most popular are cloud-based solutions, APIs and data integration, mobile solutions, and more sophisticated business intelligence and analytics (see Figure 9). The centrality of cloud-based services to strategic plans is of particular note. Despite the industry s traditional conservativeness and its reluctance to share proprietary investment data and contacts, participants are surprisingly open to the cloud. Of those who took part in our survey, 70 percent see a major role for cloud-based solutions in their business (see Figure 10). The rationale for shifting to the cloud includes the inherent scalability and processing power of the latest generation of distributed, online platforms, as well as the reduced management burden associated with externally hosted services. As Allison Piet of MetLife notes, We spend a significant amount of time just testing whether or not everything still works if we do an upgrade, so it s not just worrying about upgrading core, it s upgrading core and not breaking all of the additional infrastructure we ve built outside of the system. The ability to leave such hassles to trusted external providers seems to be a key reason why cloud-hosted platforms and solutions feature so strongly for the industry. Figure 10. What role do you see for the cloud within your business? LIMITED ROLE 27% NO ROLE 3% MAJOR ROLE 70%

10 9 The Promise of Tomorrow: Private Equity and Technology Figure 11. What role do you see for the cloud for each of the following areas in your business? Data process 58% 36% 6% Data privacy 54% 39% 8% Cyber security 51% 40% 10% Automation 46% 39% 14% Dealflow 46% 44% 10% Regulation 43% 48% 10% Workflow 38% Major role Limited role No role 52% 10% In terms of how the cloud might best be leveraged, the greatest potential is seen in migrating data processes. Some 58 percent of respondents envisage a major role for solutions in this area (see Figure 11). The cloud is now ubiquitous, says Chung of FIS. We re seeing clients whom we would never have expected to pursue a deployment of a platform in the cloud, and now they re looking at leveraging cloud services. These are all traditionally the types of clients that have self-hosted, he adds. More, not less, secure in the cloud Equally striking is the industry s general comfort with the cloud in terms of security and data privacy. Although a layman s view might associate cloud computing with increased exposure to risks of data theft and hacking, many of those surveyed for this report are of the opposite view. Some 93 percent of respondents see cloud-based computing playing some role in enhancing data privacy, while 91 percent have a similar view of the cloud s role in improving cybersecurity (see Figure 11). This may indicate a modern view of technology in which external hosting of data and applications by dedicated providers is seen as more secure and easier to manage than in-house solutions. Indeed, the need to improve data privacy constitutes a primary business reason for using the cloud. Almost 30 percent of respondents cite this as their rationale, while significant numbers identify cost savings and cybersecurity 93% of respondents see cloud-based computing playing some role in enhancing data privacy. (see Figure 12). If moving data processes to the cloud logically increases the need for robust privacy and security, a significant percentage of industry participants believe that the cloud itself provides the necessary safeguards. In short, using the cloud is seen as safer than not using it. Notably, none of the respondents agree that there is no business reason to use the cloud. Figure 12. What is your business reason for using the cloud? Data privacy 29% Cost 28% Cyber security 23% Regulation 12% Compliance 5% Other 4%

11 The Promise of Tomorrow: Private Equity and Technology 10 Multi-vendor solution or one-stop shop? Interest in cloud-centric models is also consistent with a preference for multi-vendor solutions rather than singlevendor ones. A multi-vendor cloud environment allows users to select best-of-breed technologies that are both more secure and of higher specification. A majority (60 percent) of respondents prefer multiple-vendor to single-vendor solutions (see Figure 13). Figure 13. What is your preference when selecting a technology solution? On the other side of this debate, a significant 40 percent still prefer the single-vendor option, and technological improvements may even increase this share in the future. Sooner or later, someone will come out with a system that can handle a large macro fund that trades a thousand trades a day but also be able to handle a private equity fund with, say, 15 SPVs (Special-Purpose Vehicles) and 20 deals, says Christopher Day, managing director of Custom House Fund Services (Singapore) Private Ltd. SINGLE VENDOR 60% MULTIPLE VENDOR 40% Overall, it seems likely that decisions on whether to buy an all-in-one solution from a single supplier or a range of software and platforms from multiple sources will depend in part on the interoperability of customers systems, with data standards a likely pre-condition for multiple-vendor strategies. For now, the ability to integrate different solutions is the primary concern for 37 percent of the 183 respondents considering a multi-vendor approach (see Figure 14). FIS Tony Chung recognizes this concern and sees the need for software platforms to be able to be integrated with industry-standard tools. He says, It sounds great where you go to a one-stop shop that can do everything, but we all tend naturally to go for best of breed. We want the best tool for the job. How many times have you made multiple trips to Home Depot because you didn t get the right tool in the first place? With the advances in technology, integration is less of a problem than maybe it was 10 to 15 years ago. When designing an open system, integration is always at the forefront. Figure 14. Using a multiple vendor approach - what are the primary concerns? Ability to integrate 37% Infrastructure requirements 34% Multiple vendors to manage 29% No concerns 0%

12 11 The Promise of Tomorrow: Private Equity and Technology Outsourcing catches on While other asset classes have already shifted to outsourcing, service providers have only now been putting the systems in place to support private capital asset classes. As with the cloud, it appears that the private equity industry is ready to respond. The introduction of outsourcing, especially when combined with the rise of highly network-enabled technologies already discussed, will allow private equity firms to focus on where they add value. Outsourcing also aligns with internal priorities to manage costs and efficiency. So far, it appears that the industry believes the area of most core value to be in middle-office functions such as compliance and risk management. Sixty percent of respondents say the middle office is most likely to remain inhouse by 2020 (see Figure 15). That 40 percent of respondents do expect to outsource middle-office functions underlines the considerable scope for efficiency gains, even in this area. Nonetheless, this is less than for front- and back-office functions, which 44 percent and 54 percent of respondents, respectively, say they plan to outsource by 2020 (see Figure 15). While they don t specify their reasons, plans to outsource the front and back offices could reflect a desire to save money or enhance performance in areas where human error and fraud are at present particularly costly. Figure 15. By 2020, my business is likely to: Outsource back-office functions 54% Outsource front-office functions 44% Outsource middle-office functions 40% None of them 4% 40% of respondents expect to outsource middle-office functions.

13 The Promise of Tomorrow: Private Equity and Technology 12 Investing in customers and markets The private equity industry s efforts to reinvent its relationship with technology also reflect recognition of the critical importance of technology to winning and retaining customers and to penetrating new markets. Some 67 percent of the respondents in our survey will increase investment in customer experience or market expansion by 2020, perhaps indicating an awareness that the services they currently offer to clients are no longer as up-to-date or competitive as they would like (see Figure 16). The imperative to provide excellence in customer servicing and ensure that customer-facing solutions outperform those of competitors is certainly on industry participants minds when they look at the role of new technology in their strategic investment plans. Survey participants take on the role of big data, itself a trend tightly bound to the shift into the cloud, is instructive in this respect. Although cost is a compelling factor, for 50 percent the greatest competitive potential of big data is seen either in its impact on customer experience or, relatedly, in helping firms to diversify their offerings (see Figure 17). As Chung of FIS says, It s a very competitive world now. The challenge for service providers is how to provide the same level of personalized service to retain the client relationship without sacrificing margin. He adds, Customer experience and market expansion, we think that s something that s going to be a big trend, not only now but in the future. Why? Because with managed services and many processes being automated, how else is there to differentiate yourself from the competition? Figure 16. Where will you increase investment the most by 2020? Customer experience 34% Market expansion 33% Regulatory compliance 19% Talent management 9% Disruptive technologies or companies 5% Figure 17. Where will big data deliver the biggest competitive advantage by 2020? Cost or operational efficiencies 28% Customer experience 26% Diversified offerings 24% Optimized cash and liquidity 19% New markets 3%

14 13 The Promise of Tomorrow: Private Equity and Technology Conclusions Clearly, private equity firms see technology in positive terms as an asset to their future competitiveness. They are already exploring a dazzling range of modern technologies that can be used to streamline and automate a multitude of tasks, including compliance, analysis, reporting, deal-flow management and back-office functions. New approaches such as data standardization, automation, and leveraging cloud-based solutions have the potential to fundamentally shift private equity s relationship with technology and to give firms multiple competitive advantages based on added speed, precision and sophistication. The ability to achieve high levels of automation and outsourcing could mean that the industry is about to undergo a round of major structural changes. A huge array of traditional roles will end up being divided into those that can best be undertaken manually and those that should be automated. The private equity firms that embrace the opportunities and cost savings provided by the latest technologies are likely to perform more strongly in the marketplace. Our research has shown that the industry still has some way to go before it fulfils the promise that such a transformation offers. Despite all of the opportunities technology has opened up to the market, many private equity firms remain locked into using Excel and reliant upon labor-intensive number-crunching. Like any industry that falls behind with implementing new technologies, the private equity sector seems to understand, and even embrace, that the time to change is now. In this traditionally conservative industry, the cost of inaction could rapidly start to exceed the cost of action, especially if firms remain unable to benefit from the reduced costs, enhanced insights and responsive customer experience that the latest technologies now make possible in this increasingly competitive, fast moving and globalized industry.

15 The Promise of Tomorrow: Private Equity and Technology 14 Segmenting the data: Different perspectives GPs vs LPs The full survey captured the views of 102 general partners (GPs) and 100 limited partners (LPs), as well as 103 service providers and/or fund administrators. How does the view of GPs and LPs differ when it comes to technology, and what are the implications for the working dynamic between them? In many respects GPs and LPs views on technology are very similar, but they differ in some important respects. For example, GPs appear more interested in data processes and LPs slightly more interested in regulation (see Figure 18). But perhaps the most fundamental difference in agenda reflects the fact that LPs are largely driving improvements in transparency. From a GP perspective, technology is seen as a way to enhance competitiveness and in particular as a means of being more responsive to the needs of LPs. An increased regulatory burden could be behind this difference. Since 2008 and the global recession, we ve seen a landslide of new regulation and compliance requirements coming in, says Bruce McGlogan, head of Private Equity and Real Estate Fund Administration for global advisory and administration firm Maitland. With all of this regulation, GPs are finding it more difficult to keep pace with the technology and cope with these increasing demands. They want, basically, to outsource that. In terms of the big picture, there is nonetheless a broad consensus on the overall importance of technology for private equity with differences only in the degree of enthusiasm. Figure 18. Which area of technological innovation within private equity is most important to you? 34% 28% 19% 18% 16% 13% 13% 11% 10% 10% 11% 8% 6% 4% Data processes Automation Cyber security Dealflow (e.g., Business operations) General Partner Data privacy Regulation Workflow (e.g., Human operations Limited Partner Base: General Partner: 102; Limited Partner: 100

16 15 The Promise of Tomorrow: Private Equity and Technology Data standards Both GPs and LPs place a high emphasis on data standards. This is especially important to GPs, 93 percent of whom think these could help to drive innovation, compared to a still high 82 percent of LPs (see Figure 19). Overall, this result indicates that both groups would like it to be easier to share and repackage their data. Figure 19. Do you think data standardization could help to drive innovation? NO 7% As for where data standards could help most, GPs emphasize company financials and underlying portfolio data, with 44 percent of respondents seeing this as the area with most gains to be made. By contrast, a third (33 percent) of LPs prioritize investor contacts perhaps illustrating the broader commitments to shareholders implied in their institutional role (see Figure 20). YES 93% GENERAL PARTNER Base: 102 NO 18% YES 82% LIMITED PARTNER Base: 100 Figure 20. Within which areas of private equity would data standards help you the most? 44% 33% 28% 22% 21% 20% 9% 10% 9% 4% Company financials/ underlying portfolio companies Fund information Investor organizations and contacts Cash flows Capital accounts General Partner Limited Partner Base: General Partner: 95; Limited Partner: 82

17 The Promise of Tomorrow: Private Equity and Technology 16 Leveraging automation for compliance Perceptions differ significantly when it comes to the impact of technology on regulatory compliance. Almost a third of GPs see the automation of data collection and aggregation as most important, compared with little more than a fifth of LPs (see Figure 21). Meanwhile, LPs are more interested in automated reporting, with 30 percent identifying this as a key role for technology. This is much less important for GPs, with 19 percent. Figure 21. In which areas could technology most help your business with regulatory compliance? 31% 30% 21% 22% 20% 19% 17% 12% 11% 9% 6% 3% Automating data collection/ aggregation Automating auditing Automating reporting Gathering more data More efficient decision-making Automate tracking General Partner Limited Partner Base: General Partner: 102; Limited Partner: 100

18 17 The Promise of Tomorrow: Private Equity and Technology The cloud Although both cohorts recognize the potential of cloudbased services, GPs are markedly more enthusiastic; 77 percent of them see a major role for the cloud, whereas only two-thirds (66 percent) of LPs feel similarly (see Figure 22). Views on how best to leverage the capabilities of cloudbased solutions differ, too. A majority of GPs (75 percent) see the cloud as a means of improving data privacy (see Figure 23). Less than half of LPs (46 percent) feel that data privacy is similarly important 29 percent lower for LPs than GPs, a striking difference. Figure 22. What roles do you see for the cloud within your business? NO ROLE 1% LIMITED ROLE 22% MAJOR ROLE 77% NO ROLE 2% GENERAL PARTNER Base: 102 NO 18% YES 82% LIMITED PARTNER Base: 100 Figure 23. What role do you see for the cloud for each of the following areas in your business? Data privacy 75% 24% 2% GENERAL PARTNER Data process Cyber security Automation Dealflow Regulation 50% 48% 58% 68% 72% 28% 28% 4% 32% 10% 44% 6% 46% 6% Workflow 41% 50% 9% Major role Limited role No role Data process 56% 38% 6% LIMITED PARTNER Regulation Dealflow Data privacy Cyber security 51% 47% 46% 44% 41% 8% 45% 8% 50% 4% 50% 6% Automation 41% 48% 11% Workflow 40% 51% 9% Major role Limited role No role Base: General Partner: 102; Limited Partner: 100

19 The Promise of Tomorrow: Private Equity and Technology 18 Instead, LPs identify data processes as the most likely area in which the cloud could play a major role although a response rate of 56 percent indicates that they remain much less enthusiastic on this score than GPs, 72 percent of whom see the cloud playing a major role in data processes. After data processes, LPs emphasize regulation (51 percent) and dealflow (47 percent). These variations are echoed in the differences in primary business reasons cited for using the cloud. For GPs, data privacy is the key reason, followed by cybersecurity (see Figure 24). By comparison, 28 percent of LPs are focused on using the cloud to reduce costs and only 24 percent see data privacy as the main rationale. Figure 24. What is your primary business reason for using the cloud? 34% 28% 28% 24% 25% 20% 18% 8% 6% 3% 3% 2% 1% 0% Data privacy Cyber security Cost Regulation Compliance Other No reason to use the cloud General Partner Limited Partner Base: General Partner: 102; Limited Partner: 100

20 19 The Promise of Tomorrow: Private Equity and Technology Outsourcing Approaches to using technological innovation as a platform for outsourcing also vary slightly between GPs and LPs. Both cohorts see themselves as most likely to outsource backoffice functions by 2020 (see Figure 25). However, the front office is the next most likely target for outsourcing by GPs, whereas LPs place a higher emphasis on moving middleoffice functions to external suppliers. Figure 25. By 2020, my business is likely to? 52% 47% 47% 49% 41% 42% 7% 4% Outsource front-office functions Outsource middle-office functions Outsource back-office functions None of them General Partner Limited Partner Base: General Partner: 102; Limited Partner: 100

21 The Promise of Tomorrow: Private Equity and Technology 20 Looking ahead Among GPs, the highest numbers say they are currently exploring technologies for cloud services, APIs and data integration, mobile solutions and analytics/business intelligence (see Figure 26). By contrast, LPs rank APIs and data integration first, followed by the cloud, analytics/business intelligence and encryption. Chung of FIS says, It s all about helping GPs and LPs have better information. The next evolution is being able to unlock all the data that is out there and start to make good use of it so that people can start to make intelligent decisions. Figure 26. Which technologies are you currently exploring? Cloud APIs/Data integration 79% 83% 27% 21% GENERAL PARTNER Mobile Analytics / Business Basic communication tools Encryption 61% 70% 75% 74% 25% 26% 30% 39% Excel enhancements Blockchain Self-hosted solutions 42% 41% 47% 53% 58% 59% Yes No APIs / Data integration 82% 18% Cloud 75% 25% Analytics / Business 71% 29% LIMITED PARTNER Encryption Mobile Basic communication tools Excel enhancements 59% 59% 59% 68% 32% 41% 41% 41% Self-hosted solutions 53% 47% Blockchain 43% 57% Yes No Base: General Partner: 102; Limited Partner: 100

22 21 The Promise of Tomorrow: Private Equity and Technology Appendix: Survey details Methodology This study has been conducted by Lantern Insights, an independent U.K.-based thought leadership research company, and sponsored by FIS. Predefined professional demographics and industry geographies were set prior to conducting the survey. Technologies with the potential to impact the private equity industry were assessed and developed into a 22-question survey. The questions were designed to draw out respondents opinions on industry trends, impacts and opportunities. An online and telephone questionnaire was completed by a total of 305 respondents. The full survey responses have been tabulated and charted by question, and the data further sifted to identify trends across the overall sample. The data has also been parsed for variations between GPs and LPs and for differences between specific regions and the rest of the world. The survey was supplemented by qualitative interviews. Small extracts from these interviews are quoted in the report.

23 The Promise of Tomorrow: Private Equity and Technology 22 About the survey sample The sample of 305 industry experts consisted of three functional cohorts: GPs or equivalent (33 percent), LPs or equivalent (33 percent), and service providers/fund administrators (34 percent). By geography, the highest share of respondents, 17 percent, was concentrated in the United States, followed by the United Kingdom (11 percent), Australia and South Africa (both 10 percent). The remainder were from a range of countries/jurisdictions: Canada, France, Germany, the Netherlands, Singapore, Hong Kong SAR, Japan, Brazil, Mexico, Chile, Colombia, Peru, Saudi Arabia, the UAE, Luxembourg and Switzerland. Respondents employers ranged in size. By assets under management (AUM), medium-sized firms with $1 billion to $4.99 billion in AUM were the largest subgroup, accounting for 28 percent of the total. The next largest subgroups were small organizations with up to $99.99 million in AUM (15 percent of respondents) and those with $5 billion to $9.99 billion in AUM (15 percent). People working for firms with more than $100 billion in AUM comprised only 5 percent of the sample. The most common job title was senior management level (29 percent), followed by manager (14 percent) and partner/ceo/principal or equivalent (9 percent). Respondents by function Respondents by location SERVICE PROVIDERS / FUND ADMINSITRATORS 34% GPs OR EQUIVALENT 33% OTHER* 52% UNITED STATES 17% UNITED KINGDOM 11% AUSTRALIA 10% LPs OR EQUIVALENT 33% SOUTH AFRICA 10% * CANADA, FRANCE, GERMANY, THE NETHERLANDS, SINGAPORE, HONG KONG SAR, JAPAN, BRAZIL, MEXICO, CHILE, COLOMBIA, PERU, SAUDI ARABIA, THE UAE, LUXEMBOURG AND SWITZERLAND.

24 About FIS FIS is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Florida, FIS employs more than 55,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of Standard & Poor s 500 Index. For more information about FIS, visit getinfo@fisglobal.com 2016 FIS FIS and the FIS logo are trademarks or registered trademarks of FIS or its subsidiaries in the U.S. and/or other countries. Other parties marks are the property of their respective owners