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Private equity’s data transformation journey

June 2024

11 June 2024 - The ability to access timely, accurate and granular data in an automated fashion is critical to creating an efficient and scalable operating model says Tim Harvey, Head of Private Equity and Private Credit - North America, Citco Fund Services (USA) Inc.

Where is the private equity industry currently in terms of its willingness and ability to leverage the power of data?

We have certainly seen a huge amount of progress, particularly over the past few years. There is seldom a conversation had with either an existing or prospective client, where harnessing data is not one of the top three topics of discussion. Private equity firms are looking to improve the timeliness and accuracy of data, the granularity of data and their ability to access and analyse that data in a more effective way, particularly as they continue to scale their operations.

As a fund administrator, we have a role to play in supporting them on this journey, helping them leverage the power of their own data, whilst also enhancing their data set with our own. In order to do that, we need to be able to collate the data, connecting with the tools they have internally. We also need to be able to validate the data, and to access it efficiently, which is where automation comes in.

How do you solve this challenge of access to the data in the first place?

As fund administrators, we need access to the client’s bank accounts in an automated fashion, to help with cash reconciliations, for example. That is the easy part. But the reality is that there is still a lot of paper – or at least pdfs – involved in private equity today. Deal docs are a prime example; it remains a very manual world. But the industry is starting to experiment with automation in this regard. Citco, for example, has recently rolled out Citco Document Intelligence. This is an AI-driven tool that is able to identify particular terms, and pull relevant numbers, from documentation, with a human there to fulfil the function of data validation.

Is it inevitable that the human touch will continue to be required in private equity’s digital transformation journey?

I do think it is unrealistic to think that the data journey will ever be automated from start to finish. There are certain processes that are inherently manual and certain interactions with our clients that will always benefit from the human touch. Is email the most efficient communication tool for calling £10 million? Probably not. In circumstances such as that we would use our Citco Collaboration Platform, effectively a workflow tool that is replacing the use of email. But there are other processes that will never be fully automated.

How transformative do you believe AI will be across private equity back and middle office functions, overall?

Citco Document Intelligence represents the perfect use case for AI in many respects. The ability to use AI to go through a lengthy document, pulling out the pertinent details, rather than having a human being laboriously work their way through 300 pages, clearly creates efficiency gains. We are also able to use AI when it comes to cash reconciliations, for example. The AI model is able to learn which line items should match, reducing the time that Citco teams need to dedicate to this activity.

Indexing of documents is another interesting area. It is great that we now have access to all of this information in a centralised inbox, but how do we then index that information so that it is directed to the right place? For example, where a manager has multiple funds in play, each executing multiple investments, how can we use AI to identify that a particular document relates to a particular fund and a particular transaction within that fund? Those are just some of the use cases we are currently exploring at Citco and I know there is also a lot more that different teams are working on behind the scenes.

What role can data transformation play in supporting investor communication, as LPs continue to demand increasingly granular information and as regulatory oversight intensifies?

From our client’s perspective, the investors in their funds are the most important cog in the wheel and so they absolutely prioritise ensuring that those investors are getting the right level of service. As a result, this is one area where human involvement is definitely key. It is therefore extremely unlikely that we will ever respond to an emailed investor enquiry with a ChatGPT response. The nuances of investor requests mean that they will never be answered by an AI engine. That said, we are able to use automation tools to give our teams faster and better access to the data in order to respond to those queries. That is certainly a part of the digital transformation journey.

Meanwhile, it is also true that the SEC’s new Private Funds Rules are intensifying the need for automation in investor relations. We don’t yet know exactly what the final outcome of the reporting requirements will be, but we do know that the ability to use automation tools to generate those reports will be critical.

To what extent is the drive to digitalise increasing the use of outsourcing?

This is a crucial factor in many of our client’s decisions to outsource. They are looking to build a more efficient operating model and they want access to scalable tools and expertise in order to do so. It also comes down to the bottom line. Engaging a third-party admin is generally cheaper than trying to develop the necessary resources to do the same work inhouse. That therefore directly impacts the performance of a private equity firm’s funds. GPs are focused on managing expense ratios and outsourcing is a compelling way to do that. In short, outsourcing allows firms to focus on the most value accretive activities where their real expertise lies. But as the more cost-effective model, it also has a direct link to returns.

First published in The Drawdown’s Fund Administration Report 2024

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