According to the results of the fourth barometer published by the Association Française du Family Office (AFFO), private equity makes up 21% of allocations. Assets under management in private market funds had reached $4 billion and $2.5 billion in private equity at the end of 2017. In the face of this strong demand, significant challenges are now emerging that fintechs need to address in order to support the development of private equity.
A diversified offering to respond to multiple investment objectives
Private equity has grown considerably in recent years and has now become polymorphic. It encompasses a wide variety of fund strategies with different objectives. Some funds are investing seed capital in promising start-ups with investments in venture and growth capital, while others are attempting to redress the situation of industrial giants in difficulty (distressed private equity). In parallel, funds of funds provide access to specialised funds. This is particularly the case for property funds that invest in real estate and adopt a number of strategies ranging from low-risk to more speculative activities. Emerging in response to demand for more responsible and more ethical investments, evergreen private equity funds offer investors an alternative for long-term investment.
Exponential growth facing numerous challenges
As with the entire post-2008 financial world, the tightening of regulations – particularly the AIFMD (Alternative Fund Management Directive) and the Volcker Rule – is forcing portfolio managers to adapt to internal requirements (conflicts of interest, valuation, allocation of costs, misrepresentation of the facts, etc.). For independent managers, this involves being able to demonstrate the compliance of their investment decisions at all times. In addition, while private equity performance is expected to be visible in the short term, evergreen funds tie in with a concept of seeking long-term returns by integrating sustainable investment criteria. As a result, managing funds that focus on a variable performance is based on the ability to set and evaluate heterogeneous indicators (financial, environmental, social, etc.)
The innovation of financial technologies (fintech) as a facilitator
The diversity of private asset allocations makes consolidation particularly complex and time-consuming for managers, who continue to work on a largely manual basis in order to obtain a global overview. The development of fintechs, and particularly “wealthtechs” (technologies used for wealth management) is making it possible to automate this task. Regardless of the investments in question (financial, non-financial, etc.), assets are consolidated automatically based on the desired view (by portfolio, by client, etc.). Similarly, in response to the regulatory constraints imposed by the AIFMD and the Volcker Rule, regtechs (fintechs specialising in compliance management) are making it possible to automate controls and provide detailed information on the traceability of each flow. The lack of opportunities and the difficulty of identifying PE investment opportunities reliably, pose a major challenge for managers. It is difficult to find the right investment objectives with the appropriate valuations. Artificial intelligence (AI) offers a particularly promising solution, especially in the form of virtual data rooms (VDR), which allow the best possible results to be obtained, whether for a one-off transaction or to create value throughout the entire asset life cycle.
Fintechs and private equity – a match made in heaven? Fintechs offer investment opportunities that are highly sought-after among investors. This attraction supports the development of these financial technologies, which ultimately help to simplify and facilitate investments in private equity by removing or reducing the main obstacles faced by investors.