Private Equity

The Value of Private Equity Software Platforms

Last Updated:
October 12, 2023

With large inflows of capital searching for the right investments, firms need to harness more innovative ways of finding those investments first. Private equity platforms are a technology solution to help firms get ahead.

Operational efficiency continues to be a key priority for private equity firms. According to the Ernst and Young Annual Global Private Equity Survey (2022), CFOs say they are now planning on doubling down on technology investments, having witnessed how it played a key role in keeping them going during the 2020 pandemic shutdowns.

Notably, private equity software platforms also help to enable remote work. Cloud-based technology means that all members of the firm can access the information they need in real-time, knowing it is always up-to-date. The EY survey found that across the board, private equity firms expect employees will continue to work remotely around 30% of the time.

Here’s a closer look at how private equity platforms work and how firms can gain a competitive advantage:

Why Private Equity Platforms Are Valuable

Technology is increasingly acknowledged as a key element for supporting critical investor relationships and managing the complex world of private equity. Technology is there to help streamline fundraising, deal management, due diligence, and client or investor relationship management.

Among partners and investors, expectations are high that the most efficient systems and processes will be in place and that they’ll be able to access the information they need quickly. This is why private equity platforms are important. The technology facilitates speedy communication and efficient management.

Consider also the engagement between managers and investors. You might expect that over 2020, that would have been severely impacted by remote work, however, results from the Ernst and Young survey suggest otherwise. From an investor perspective, 80% say disruption was minimal while 66% of managers believe the same. Technology has been the key to keeping the engagement in these relationships, even at a distance.

For many firms, this has been a key part in remaining competitive. Those who have found the most efficient technology stacks have developed a competitive advantage over anyone who found themselves behind in getting together solutions for remote work.

Problems Private Equity Software Solves

There are some challenges or problems that many private equity firms have in common. Finding good technology solutions to help with these can come with great advantages. Here are some of the top issues:

Streamlining Internal Operations

Over the last few years, technological innovations have improved the opportunities for automation among businesses of all types. The same can be set for buyout firms, although according to the Ernst and Young survey, “private equity managers still remain behind their peers in automating their core business operations.”

The survey found that larger managers were much more likely to be using software for automation within their business than smaller managers, although many smaller managers tended to outsource. Compared to alternative asset classes such as hedge funds, pe firms lag overall.

Business automation represents an opportunity to gain an advantage. It means that key tasks are done automatically and the people in your firm can get on with other activities that add more value.

Automation also helps to mitigate or even eliminate human error. Spreadsheets, manual processes and disparate systems all provide opportunities for error. Automation, combined with “single source of truth” software, helps to ensure critical information doesn’t get missed.

Meeting Investor Demand

Top-tier institutional investors who make private equity investments expect a level of professionalism from their managers.  If you’re still reliant on Excel spreadsheets and other manual methods of tracking and recording, a potential LP may take that as a signal that you may not be ready for their investment.

Investors are increasingly demanding that they get a more streamlined experience, where information is readily available whenever they need it. Software solutions with strong reporting and communication tools can help to meet that demand and give your firm a forward-thinking reputation.

Deal Sourcing

Deal sourcing is a core function of the private equity firm, but it’s still one of the most challenging. In a competitive environment, you need to be positioned to harness proprietary deal flow ahead of your competitors.

There are a couple of ways in which software can help with this. First, as many deals are often sourced through your networks, relationship intelligence is a key tool to have available.

Software like 4Degrees centralizes a view of your team’s relationship network so that connections don’t get lost among spreadsheets and disparate systems.  Those connections include business owners that you’ve made direct contact with, investment banking teams that include you in their processes, or other great referral sources that drive deal opportunities your way.

Our solution will also search worldwide for information about your team’s relationship network, helping you to unearth potential deal opportunities.  Products like these become even more powerful as you expand the firm’s network – both through the ordinary course of business, but also as you build advisory boards of industry leaders to help you find great companies.  In addition to their depth of expertise, the key point of value that these advisors often bring to firms is an extensive network of relationships – and systems like 4Degrees enable you to tap into that for a number of purposes (including sourcing).

Another way private equity platforms can help with business development is by automating company searches based on non-relationship-based signals. These can help to provide your firm with a list of new companies that you may not have been aware of before. Software platforms such as Sourcescrub scrape data from things like conferences and award lists to help provide you with more options.

Tracking Investment Opportunities

Private equity platforms can also serve as a central source of truth for promising companies that could be attractive platform companies or add-on acquisitions in the future.  These investment platforms allow you to accomplish a number of different goals, including:

– Ensure that promising investment opportunities don’t fall through the cracks, and that companies of all sizes (startups, middle-market companies, large acquisition targets) all get a timely response.
– Tracking company performance metrics (e.g., EBITDA, valuation and liquidity expectations) you gather in your conversations with management team members and track their progress over time.

– Tracking firm metrics – such as the # of deals seen per year, the # of deals seen by sector (e.g., healthcare), or the # of deals by deal type (e.g., add-on vs. platform company).  Put together, those metrics enable easy reporting to LPs and institutional investors and demonstrate your proven track record of finding great deals.

– Build an internal database of private company metrics that are best-in-class to inform the opportunities you evaluate.  This is especially valuable given that the private markets, unlike the public markets, keep company performance close to the vest.

Portfolio Company Monitoring

Once you’ve made a set of investments in platform companies, their fate now determines yours.  As a result, keeping a close eye on company performance enables you to stay informed on their progress.

Some private equity investors also use this as an opportunity to track value creation initiatives they identified as a part of the investment thesis.  In some cases those initiatives are synergies they expect from being a part of a larger platform, in others, it’s the ability to make longer-term capital investments to drive greater competitiveness.  Having strong visibility around how those initiatives are tracking allows the team to determine if more resources and intervention are needed, while also helping managing directors assess the quality of the management team and how they execute.

Better Internal Coordination

How does your firm share information with your investors? For many, this involves multiple emails, phone calls or letters. Obviously, none of these forms of communication “talk” with one another and all can be slow or lead to miscommunication. Even email, which is delivered quickly, is inefficient. Inboxes tend to be inundated with emails, and it’s easy for them to go missing or be overlooked. Then there’s the effort involved with trying to track down previous communications…

Investor portals are one software solution that can bring an end to communication issues and help to create a great impression with investors. Portals become a “one stop shop” for communication, where investors can find what they need quickly and both firms and investors can view communications.

Connectivity Among Remote Team Members

We mentioned the challenges of the pandemic earlier, and how firms that had a good technological base were able to keep up strong customer relations. One thing that firms have found is that a good proportion of their teams would like to have the option to keep working remotely, even if just part of the time.

Remote work itself has been associated with several positive benefits to employee wellbeing and productivity. Cutting out commutes and developing a home-based routine suits many people well (but not everyone!). One thing that must be maintained is the connectivity to other members of the firm.

Members who work remotely often need to be able to access the same information simultaneously. They need to know that it’s accurate and up-to-date, which are features of cloud-based private equity platforms.

There’s also a need to maintain the team dynamic and ability to communicate clearly. This is another thing software can do.

Gain Competitive Advantage With Private Equity Platforms

There’s really no way to soften it: private equity firms that don’t invest in technology solutions to streamline or mitigate business challenges will be at a disadvantage.

Surveys show that large numbers of private equity firms are committing to improving their technology stack and employing state-of-the-art private equity platform solutions. There is competitive advantage simply in being more efficient, but also in finding those critical deals first.

Whether your firm is going back to the office, staying fully remote or adopting a hybrid model, technology is here for your advantage. It’s time to upgrade and stay ahead of the pack.  And if you’re looking for help, feel free to request a demo here.

Meet The CRM Built For Deal Teams.

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4Degrees is tailored for the sourcing, relationship, and pipeline activities that drive your business.
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