Kjael Skaalerud Featured in the Preqin Private Equity Q1 2022 Report

Private equity turns to tech for competitive advantages

Altvia’s CRO, Kjael Skaalerud, talks with Preqin about the changing competitive landscape in private equity, and how tech is giving some managers the upper hand.

Private equity has become an increasingly competitive environment. More investors are allocating to the asset class, and the number of funds in market has increased accordingly. Which GPs are thriving most in this market and which are struggling to deploy capital?

At the risk of stating the obvious, the PE market continues to shatter records each quarter and has never been more competitive, with an estimated $6.8tn of AUM now in the asset class. The middle of the pack has swelled due to general outperformance, as measured by returns and IRR, so it’s more difficult for the slightly above-average fund manager to stand out, and the laggards are really struggling to keep up by any measure. The industry has always rewarded speed and sound decision-making, though we’re seeing a big shift in strategic focus, as it relates to the operating leverage that unlocks the pace now required to be elite.

Let’s loosely define speed as: responsiveness to LPs, diligence execution, and, of course, origination. Operating leverage to better achieve these objectives has traditionally been a function of human horsepower. PE is quickly recognizing that most modern operating leverage comes from technology, mainly: automation, information streams, analytics (to accelerate comprehension of data), etc. Furthermore, GPs are realizing technology is an underexploited lever at their firms. The status quo has remained unchallenged for years, which allows the incumbents to remain steadfast in their ways. The PE market is now broadly starting to accept that ‘every company is a tech company.’

How is Altvia helping GPs meet these challenges?

The primary challenge for PE managers today is moving faster without sacrificing effectiveness, and this is where Altvia steps in. In the simplest sense, it starts by getting every team, and each stage of the investment lifecycle, living under the same roof in terms of technology and data.

We frequently see LPs asking about their capital call history or wanting to know the status or progress of a portfolio company. This scenario sets off a chain of events from the initial request to the investor relations team and their CRM system, then to fund accounting for an account statement, and later the investment team to gather KPI data on figures like revenue and margins. All the while, the LP is tapping their fingers on the table, wondering if the delays mean the firm simply doesn’t have it together.

Altvia brings these high-traffic applications, CRM, fund and portfolio monitoring, and LP portals

into a cohesive platform, with the same data and insight readily available across functions, all which circumvent the hurdles and delays outlined above.

With this broad picture in mind, here are a few more specific outcomes Altvia provides. Separate from expediting transparency to LPs, many GPs lack a granular view on their own operational KPIs outside of traditional proxies such as deals per year, returns, and growth in subsequent fund sizes, among others. But the most impactful metric is typically a few layers into the onion. GPs want to understand the introductions from investment banker that led to the best returns, or which have the highest likelihood of closing, as opposed to general lead volume as this is not the ultimately desired outcome. For current investments, understanding the metrics that are leading and lagging indicators of success helps GPs course-correct operations in real-time and improve the chance of performance.

Another important concept is feedback loops. Our software allows firms to better understand the attributes of their most valuable LPs and investments, to then apply that knowledge to future investments and fundraising. Similarly, Altvia’s platform provides an objective way to measure engagement from any given audience so firms operate with a sense of priority vs. chasing up every prospective LP/investment. Lastly, as most of us are conditioned by the experiences from our daily lives, Altvia helps firms deliver the type of LP experience we’ve come to expect from financial services.

Assuming these market dynamics persist over the mid- to long-term, what technologies do you see on the horizon to help GPs keep pace or lose further footing?

Our outlook is extremely positive. The private equity industry is expected to continue growing at an estimated 16% and is generally moving up the tech maturity curve as competitive dynamics pressurize the more tenured players. We’ve never seen this level of appetite for digital transformation, and the current crop of emerging fund managers are coming from more tech-forward domains.

Additionally, we are also seeing the talent landscape change a lot, with explosive hiring demand from GPs for technology and data-oriented roles. As we see GPs become more sophisticated with technology, the emphasis changes from coordinating data and underlying infrastructure to using machine learning and algorithms to quickly process data, spot patterns, and make predictions. This shift toward technology will usher in a new era for private equity, and we are excited about the attendant potential and disruption.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.