Private Fund Tech Upheaval – November 2016

Hamilton Lane Bets on Private Fund Tech Upheaval
Article by Tom Stabile November 9, 2016 |  

Hamilton Lane’s latest corporate investment in a data analytics firm aims yet again at an opportunity it sees brewing in its own backyard – its private equity peers automating systems and operations and upgrading from the market’s low-tech roots.

The private equity advisor and fund of funds manager, which runs or advises on $315 billion, last month made its fourth direct investment in a technology provider to its own industry, becoming the largest shareholder of Bison, which provides performance and analytics systems for private market firms. That added to prior corporate stakes in Black Mountain Systems, Deal Cloud, and iLevel, a firm later sold to Ipreo, in which Hamilton Lane now has its stake. The fund manager declines to outline the size of its corporate stakes in these outfits or the value of those holdings.

“It’s a 40-year-old industry, but a lot of participants are doing things the exact same way as 30 years ago,” says Erik Hirsch, vice chairman and head of strategic initiatives at Hamilton Lane. “It remains very Excel-driven, with not a lot of online data sharing mechanisms and being very manual in how things are run and shared. If you were buying a stock, you wouldn’t pull out an Excel table to get a pricing model – you’d have real-time information.”

Hamilton Lane isn’t done scouting the market for firms that can bring private equity up to date, he adds.

“We’re meeting with new potential partners every couple of months,” Hirsch adds. “It’s a relatively under-invested area.”

Private equity firms are indeed signing on for technology and systems upgrades more often, particularly in the realm of hiring external fund administration firms, says Bill Salus, CEO of Paddock Consultancy, which he founded this year after leaving his role as an executive at Apex Fund Services. And to that end, there may well be more industry players joining Hamilton Lane in the provider scrum, he says.

“Firms have been developing expertise in these systems in-house, and there’s a value for providing these services on a third-party basis,” he says. “I’m not sure it’s for everybody – for some it’s not in their knitting to engineer a product and sell it up and down the market. But there are some that feel they can monetize their [ideas], because there’s a scarcity value of real experts in private equity [operations].”

Automating operations, using standard templates, sharing data between systems, and adopting flexible technology have been growing themes in the private equity business for several years, driven by various factors, including pressure from limited partners and regulators, and from new tools coming online.

“The investor demand for reporting and transparency is constantly increasing,” Salus says. “Firms need the reporting and analytics for the investors, and there’s always something new that regulators want.”

That was a big factor in the rapid growth for private equity fund administrators in recent years, with investors asking fund managers to outsource operations and have more checks on their books and records, Salus says. “Our private equity pipeline [at Apex] was probably five times the size of our private equity book,” he says.

As new financial technology startups have become active targeting the private funds market, they have been pulling in investments from venture capital and private equity funds adding them as portfolio companies, Salus adds. “There is a wide range of companies focused on supporting the growth of assets and these [fund managers],” he says.

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