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.