Private Ties: Technology Rises in Private Equity

Whether for Coller’s “direct” secondaries deals or its fund strategies, that means organizing data in a way that makes information actionable, DataArt’s Miller says. “Coller has a very systematic approach in how technology should support their evolving business. An idea comes to their mind, and immediately the question is how soon afterward we can put that idea on sure operational footing,” Miller says.

Choice, Not Liquidity
Innovating business models is also having an effect in private equity intermediation—particularly, the role fund placement agents play in delivering information as well as a deal-making apparatus, itself. Here, too, technology is making a mark—if more carefully.

Paris-based Triago, one of the first placement agents in the space, says a record amount of private equity commitments are set to expire in the next year-and-a-half, meaning capital will return to the market. “LPs will have more room for new commitments, and by 2013, that’s likely to drive annual fundraising back up to a two- to three-year annual range of $300 billion to $400 billion, in line with 10-year fundraising averages, though less than half the peak annual sums collected during the 2005 to 2008 credit bubble,” says Nicolas de Nazelle, a managing partner at Triago.

De Nazelle says that with private equity funds taking longer to realize investments, and thus make distributions to their LPs, investors are likely to seek strategies that shorten investment duration and that pay out quickly, which secondaries and secondary directs are designed for. How firms avail themselves of wider choices, without making the process tricky or costly, is the question.

“There may be opportunities for electronic platforms, provided they permit the use of other discovery channels such as specialist intermediaries and personal LP and GP networks. To succeed, such platforms will also have to hardwire into their operations the possibility for more sophisticated offline discussions and negotiations, given the bespoke nature of each secondary deal,” he says.

A number of such platforms have popped up the past few years, including Secondcap, Nyppex, and Palico. But theories about just what private equity firms expect are still being tested. Blending new and old appears key.

For example, Palico, created this May and hosting a swath of emerging market players like the Abu Dhabi Investment Authority and frontier markets GP specialist Leopard Capital, and Western institutions like the University of Pennsylvania's endowment, says globalizing private equity through an anonymous auction process, rather than shackling deal execution in its entirety, is the way forward.

“No one invests in private equity expecting liquidity—although it’s nice when the terms are right—but everyone always wants to know what their investment choices are across regions, specialities and structures,” says Antoine Drean, founder of Palico, noting that bidders will often only attract seller interest when the discount on net asset value is in the single digits, or 15 to 20 percent at the outer edges.

Drean says that the space’s past won’t totally fall away, because it can’t.

“An online private equity platform can do much to streamline things for discovery and engagement, but it cannot automate the entire investment process. Private equity fund management is all about taking an activist approach to investment and having a proprietary edge, which makes the human element much more important than it is in securities markets,” he says.

“If we had tried to automate the whole process from A to Z, we believe Palico would have had very little buy-in, ” Drean says, adding that GPs will often withhold their private placement memoranda (PPM) until bidders are identified and face-to-face meetings are initiated, as an example of the platform’s optional safeguards.

Peer Pressure
While all of private equity’s different players—advisers, funds, and intermediaries—continue to measure and mete a proper role for technology, the pursuit for all of them remains essentially the same: how to take advantage of an opening by thinking long-term.

Coller’s Lask says the DataArt model is not only novel, but also durable. “We have several years worth of roadmap already in place, and within our space, I like to think that we are at the ‘bleeding edge,’ not only in the technology we’re building, but the way in which we’re delivering information technology, as well,” Lask says.

Likewise, Hirsch at Hamilton Lane says once iLevel’s initial LP module is achieved, other tools like portfolio planning and cash-flow forecasting models become possible for the offering. Adoption, though never instantaneous, is now simply a matter of time because sophistication around data and reporting is no longer a choice so much as a necessity.

“There will be a peer pressure effect,” Hirsch says. “If you’re a GP, LPs will come asking, ‘Blackstone and Carlyle, Providence and TPG are doing this, so why aren’t you doing this?’ LPs are not looking to expand their number of partners. If anything, they are holding or even reducing, and the criteria as to who stays and who is cut will evolve. The quality of the firm’s infrastructure and data management are not more important than returns, certainly, but if you’re in a world where firm X and firm Y both have a 25 percent rate of return, but one reinvests LPs’ fees in their systems and demonstrates as much, that becomes an easy choice.”