Thank you to guest author Brendan Marshall, CEO of Flow, for his contributions to this article.
The private markets are notorious for their outdated (or non-existent) technology stacks. However, a new era of innovation may finally unwind years of risk-avoidant behavior that has slowed technology adoption across the industry.
Today’s Analogue Standard
Those who have experienced the back office of a venture capital (VC) or private equity (PE) firm would likely agree that, when it comes to technology, the private markets have been a standout laggard.
A recent report by Delio indicates that 74% of financial institutions feel technology “does not play a core role in delivering private market services,” a figure difficult to fathom in nearly any other industry.
Yet, despite today’s analogue standard, firms that adopt effective new technologies see meaningful and measurable results.
According to McKinsey, novel solutions for limited partner (LP) management, analytics, deal screening, and other aspects of fund operations lead to cost savings of 4-7% and productivity increases of 10-15% on an AUM-per-employee basis. In other words: the larger the fund, the more it stands to benefit from adopting new technology.
With such tangible benefits at hand, it seems curious that firms in the private markets have earned notoriety for lagging behind on the technology adoption curve.
Their hesitation is not without cause.
The Rise (and Risks) of “All-in-One” Service Providers
Over the last decade or so, several new “all-in-one” platforms have entered the private markets promising to accelerate fund operations and lower costs through automation. These discount providers drastically reduce the six figure bills that general partners (GPs) typically spend on fund documentation and formation through cookie-cutter document templates and rudimentary technology.
Unfortunately, this first wave of disruptors also increased risk in an industry with near-zero tolerance. The stakes are incredibly high in VC and PE; missing a checkbox or inputting an incorrect decimal can have seismic consequences, and those risks have come to a head in recent years. Many GPs and LPs are just now discovering the consequences of eschewing service provider expertise in favor of an “all-in-one” platform.
Such pitfalls have not gone unnoticed by the larger, institutional players that avoided this first wave of innovation. As a result, technology adoption is moving at a snail’s pace in the very industry that continues to fund rapid digitization across countless others.
The private markets are still ripe for disruption, but the next generation of technologies will need to take …….