Technology set to disrupt Private Equity
One we explored with our conference “godmother” Rajaa Mekouar, was how investors, notably family offices, were increasing their exposure to venture capital (VC) and technology-related deals. In parallel, we had seen increasing numbers of new technology tools made available and being used by fund managers. It was a small step from sharing those insights to gaining a bigger picture on how technology can disrupt the private equity (PE) and VC business.
But can we really talk of technology “disrupting” the asset class? John Holloway, former Director of Investments with the European Investment Fund, and now a senior industry advisor, says “VC has always been closely associated with the disruption of existing models and finding new ways to do things better”.
And the new model seems to be there already. Not only are there many tools supporting fund management back and middle offices, but we now also see it coming into the front office, taking an active role in deal scouting and making investments. Antoine Servais, GP Director of EQT Fund Management, will be on stage showcasing how their proprietary “Motherbrain” tool is already doing this using Artificial Intelligence (AI). He will seek to answer the question “how long until we have a fund fully managed by AI - from sourcing the portfolio companies through investment agreements negotiation, booking, reporting etc?”. Michael Jackson, venture capitalist, will get to the nub of the question: “tech mutation is moving towards an analytical based approach to a sector, rather than random sourcing and drinking coffee”.
Such scenarios may not be envisaged by all conference speakers. Olaf Kordes, Managing Director of Luxempart, believes that PE is still a very “relationship-based business”. Nevertheless, he recognises that “the amount of data is ever-growing and needs to be treated efficiently to serve the business’ purposes. Investment firms that do not automate reporting nor communication to investors will not exist for much longer”. Rajaa Mekouar also sees technology as a means to “speed up and simplify parts of the investment chain” but not as the key element of “creating long term value that protects our livelihoods”. She recognises however that it remains a “formidable opportunity to invest in disruptive companies”.
The investment opportunity is there and is valued at USD 30 trillion for AI impact alone. Nicolai Wadstrom, a seasoned Silicon Valley investor and CEO of Bootstrap Labs, highlights that “AI is the engine of the 4th industrial revolution. He notes that we are just at the beginning of one of the biggest disruptions and wealth creation opportunities” with estimates saying this is set to reach USD 30 trillion by 2037. “It is not a matter of which industry will be impacted, it is a question of when,” he says.
Adding to the AI challenge are both the new layer of decentralised finance (DeFi) and the new asset class of digital tokens. It is possible that the conference will raise more questions than answers about these topics, which in itself will be inspirational. Junhaeng Lee, CEO and Co-Founder of Gopax, a South Korean digital assets exchange, is confident that “blockchain is going mainstream and the investment opportunities go beyond any of the previous tech waves”. This will happen in particular in the investment space with “increased competitive pressure in deal sourcing” and “retail participation” plus “early-stage deals will be more and more available to the public”.
This sector, which is currently based and driven by human endeavour, contacts and trust relationships, will need to catch up with technology. According to Jean Diederich, Chairman of APSI and an expert in European regulation, “PE investors must be more and more digitally literate to be able to implement robotic process automation (RPA), machine learning (ML) and the internet of things (IoT) across their portfolio companies. Digital experts will also oversee ways in which technology is disrupting their portfolio companies, assess their cybersecurity strategy, and evaluate exposure in data-driven technologies in order to advise on the best investments”.
It’s nonetheless important that the sector does not lose its human touch. Impact investments by VCs are a strong sign that PE and VC can be a tool to change the world and society. Jerome Wittamer, co-founder of Expon Capital, a Luxembourg-based VC with multiple exits in recent months, “has successfully proved that you can make VC market returns and have a positive impact at the same time. You don’t have to trade one for the other”.
With all of the above in prospect, we should expect lively debate next week.
For more information about the LPEA Insights conference visit: www.lpea.lu/insights2021
by Luís Galveias
COO of LPEA