Asset Services Unlock Operational Value in Private Equity Firms

Private equity has come out of its shadows. It has been observed to ride the wave of public markets while taking additional share. In the last decade, private equity has grown from 1.5 percent of the global stock-market capitalization to almost 4% percent in 2012.  Though considered an “alternative” asset class, it had managed to drift into mainstream as current research found that private-equity returns have become highly correlated with public markets.

Returns from private-equity are notoriously hard to calculate because it is not standard industry practice to publish results. Due to regulatory demands, data are readily available but can be inconsistent and hard to make sense of. This is mainly due to private-equity firms and their limited partners having diverse approaches to making calculations.

Using new and more stable data, research by McKinsey and another academic team have discovered that private-equity returns are actually much higher than initially assessed. Both studies have found that over the long term, private-equity returns have outperformed public market index by at least 300 basis points.

Another interesting finding of recent research is that persistence of returns—the ability of top performers to replicate their performance—has become elusive. Before 2000, private equity firms that delivered top results were also likely to repeat those results. Limited partners focused due diligence efforts in identifying the top quartile private equity firms who can deliver consistent performance.

Unfortunately, this is no longer the case. Since 2000, persistence of returns has diminished and returns have become widely dispersed. This pattern changed the focus of value creation from performance history to operational reliability. No longer able to predict winners from past wins, investors turned to operational strength and integrity to pick their bets. The logic of this tactic rests in the case that private equity firms that can consistently manage risks, implement strategy, and maintain regulatory integrity are the ones that can perform reliably.

Reliable operational performance is best be guaranteed through the use of technology. The development of various data management, accounting, and reporting software has increased the competitiveness in an industry where reliability of process is now in the spotlight. Private equity firms are recognizing that to gain investor’s trust and capital, they need to make sufficient investment in technology frameworks.

Many asset service firms have sprung up armed with different technological tools to answer the operational needs of private equity companies. However, technology is not one-size-fits-all. The best asset service provider must be able to offer customized solutions to private equity firms.