Why Digitalising Deal Flow Management is Critical

For an industry that invests trillions of dollars in assets every year, the reluctance of global alternative asset management professionals to work with modern tech tools can seem ironic to the uninitiated. First, consider the size of the industry – McKinsey recently pegged the global private investments industry – consisting of private equity (which includes venture capital), private debt and real estate among other alternative asset classes – to be bigger than India's economy. In 2021, a record-breaking $3.5 Trillion were deployed into various asset classes, while total assets under management (AUM) grew to an all-time high of $9.8 Trillion.

And yet, the most cutting-edge technology that fund managers, asset managers, or senior professionals working in venture capital, private equity or real estate funds will work with to manage their investments or investors is a humble spreadsheet. This is despite the availability of cutting-edge software from several vendors in the market for years, all of which promise to bring all the advantages and efficiencies of automated workflows and processes that only specialized software can bring.

There are several reasons why fund or asset managers insist on sticking to the bare minimum use of tech in their day-to-day work. First, private investment management remains a highly relationship-driven industry and the prospect of quality 'deal flow', which in industry parlance refers to the rate of incoming investment opportunities, depends almost entirely upon the personal contacts of the investors, and is typically kept a secret from peers.

This is why a significant majority of professionals have a strong reluctance to upload and share data, which invariably includes personal identifiable information (PII), on a common software platform where it can be seen and copied by their peers.

Additionally, unlike in other industries where digitalization or digital transformation is frequently a top-down decision taken by the senior leadership, the latter's peers at majority of private investment funds take a lot of pride in their ability to find and swing deals completely at a personal level. Naturally, they have little time and patience for software that they need to learn before they can use it, when the conventional way of working is working 'just fine'.

The reluctance of employees or end-users to learn new ways of doing the same work, especially when the existing way is not seen as broken, is a common phenomenon that most businesses encounter when executing their digitalization strategies. It can be a challenge to convince end-users that investing time and effort in learning new software will be rewarding in the long run not only for them, but for the organization as well.

There are some concerns on the technology end as well. A majority of software promising asset or deal flow management address only one or two aspects of the entire deal process, which unfortunately has the side effect of making it more cumbersome to use them as data needs to flow both in and out. Additionally, several of these software tools are designed with little understanding of how the investment industry actually works, creating further barriers in their wider adoption. Contrast this with comprehensive and workflow management platforms available for most other industries that seamlessly integrate all processes end-to-end.

To overcome these limitations, several large VC or PE funds have invested millions of dollars in developing their own deal-flow management platforms. However, under the larger umbrella of the global private investment industry, a vast majority of firms in PE, real estate and other segments are still far from embracing modern tech tools.

Fortunately, a handful of technology startups have in recent years started paying heed to the unique and specific needs of the private investments or alternative asset management industry to create and offer tools purpose made to overcome the cultural and other barriers we have noted above. Companies like Equipped AI are in fact borne out of the alternative asset management industry and are thus able to design and develop software that is much more intuitive and yet powerful than available from other tech companies.

Ultimately, there is a clear business case for embracing digitalization and using modern tools for managing private investments, whether only for deal flow management or for integrating all processes and workflows end-to-end. Perhaps the single biggest advantage of digitalizing deal flow management comes from the analytical capabilities embedded in modern tech tools that can glean powerful and actionable insights from huge volumes of data on a regular basis.

By using a data-driven approach for managing assets and taking decisions on them, asset managers can not only identify relevant deals or opportunities early on, but also ensure that no time is wasted on ill-fit opportunities and when an investment is made, any and all red-flags are squared off beforehand.

Going beyond, digital tools that manage end-to-end workflows can augment operational efficiencies for asset managers, allowing decision-makers to focus on those areas of the business that necessitate the human touch, freeing them from unnecessary grunt work. Automating or streamlining data analytics also lowers operating costs and improves financial results, but of course no amount of automation can replace an advisor's core services.

Finally, digitization has the potential to increase the closing probability of difficult deals by a huge margin. Access to actionable insights into all available deals in the market helps investors make strong offers and can have the effect of reducing the time taken to close a deal from several weeks to days.

Embracing the right tools provides asset managers with a rare competitive advantage that has their own data as a foundation and is thus simply not replicable. Creation of better portfolios and higher returns on portfolios are the two clear outcomes of digitalizing workflows, which are no longer possible to ignore in these competitive times.

Author:

Atul Arora is the Founder and Managing Director of Equipped.AI, India's leading Alternative Investment platform