Private markets have experienced exponential growth over the last decade driven by increasing investor demand and product innovation. According to Preqin, private market assets under management (AUM) are projected to grow at an annualized rate of 10%, from $16.8 trillion in 2023 to nearly $29.2 trillion by 2029.

This rapid growth is accompanied by operational complexities, creating both opportunities and challenges for market participants. This blog explores the three key trends driving operational efficiencies and the factors contributing to these changes:

• Rising demand, fueled by increasing retail participation
• Rapid secondary market growth, riding on digital platforms and technological advancements
• Increased attention of global regulators, resulting in an expanded compliance landscape and scrutiny

The factors that contributed to the above trends are captured below:

Operational complexities are grouped into six core themes:

To surmount the challenges outlined above, maintaining operational efficiency is of paramount importance for private market firms. This would mean optimal and efficient usage of time, capital, people and all other resources employed for business purposes.

Key factors driving operational efficiencies and their impact on challenges

There are four key drivers that help optimize cost and resources thereby enabling generation of greater RoI across workflows and asset classes. They are outlined below and are instrumental in enabling scalability without compromising on quality, enhancing the use of technology and automation, and equipping market participants with AI-enabled value creation options.

The core drivers of operational efficiencies are discussed below:

• Technology and digital platforms
  • Private market players have increasingly turned to specialized tools to enhance portfolio management and gain deeper insights. The adoption of platforms such as MIK, Intralinks, iLevel, Canalyst, FactSet, and others has been a key indicator of this trend
  • A few firms are also investing in technology and building their own in-house centralized digital platforms to enhance transparency and collaboration among investors, fund managers and regulators
    • For example, iCapital is a digital platform enabling investors and fund managers to access the alternatives marketplace, including hedge funds, private equity and credit, and real estate funds

        Such platforms not only improve data accuracy and transparency but also provide greater access and penetration, which is crucial for scaling operations.

• AI-powered tools 
  • AI-powered tools can automate routine tasks including data entry and reporting, and can streamline the due diligence process by automating the review of financial documents and contracts, thereby freeing up resources for more strategic activities
  • Cobalt GP, AnonAI and GenAI by PE Stack are examples of AI-powered mechanisms that provide options to track fund performance benchmarking and investor analytics, offer private, AI-powered brainstorming, risk analysis, and confidential document drafting
  • These tools can also help private market players identify potential deals, automate the deal sourcing process, and provide predictive analytics to optimize portfolio performance and detect potential risksA few firms are also investing in technology and building their own in-house centralized digital platforms to enhance transparency and collaboration among investors, fund managers and regulators

   

       The integration of AI tools with digital platforms could lead to increased operational efficiency, reduced costs, and improved decision making and offers firms a competitive edge.
  

• Collaborating with specialized knowledge partners
  
  • To achieve scalability and keep teams lean, firms are increasingly relying on external partnerships for operational tasks to be delegated to specialized service providers and thought partners
  • This approach allows firms to focus on core investment activities like investment strategies, client relationships, fundraising and risk management while maintaining cost efficiency
  • Delegating operational, non-core activities eliminates the need to maintain in-house teams for time-consuming, process-driven tasks, thereby reducing fixed costs such as salaries and infrastructure expensesA few firms are also investing in technology and building their own in-house centralized digital platforms to enhance transparency and collaboration among investors, fund managers and regulators

   

        Third-party service providers offer a combination of flexible pricing models, bespoke solutions, automation efficiencies and thought leadership. This enables firms to scale operations (beyond a BAU scenario) in a timely and efficient manner while mitigating the risks involved, resulting in a win-win for all parties involved.
  

• Regulatory reforms and better disclosure mechanisms
  
  • Regulatory reforms and disclosure mechanisms are also evolving to ensure robustness of markets, enhance accessibility to information and investor protection
  • For example, private markets in the US are subject to SEC regulations and periodic disclosure requirements – including climate-related ones - based on AUM levels. Their European counterparts are subject to more stringent requirements through MiFID II, Alternative Investment Fund Managers Directive (AIFMD), and ESG-specific disclosures using Sustainable Finance Disclosure Regulation (SFDR), and Corporate Sustainability Reporting Directive (CSRD)A few firms are also investing in technology and building their own in-house centralized digital platforms to enhance transparency and collaboration among investors, fund managers and regulators

   

        Regulatory reforms that streamline compliance requirements and help with the interpretation of complex regulations, in addition to tools and platforms that enable smooth reporting, have been critical in driving efficiencies for market participants.

   

Conclusion

Private markets are evolving rapidly, with increased retail participation, secondary market growth, and regulatory oversight driving operational complexities. Addressing these challenges requires a holistic approach that integrates technology, AI, collaborations, and regulatory alignment.

By leveraging these drivers, firms can build a resilient ecosystem that fosters sustainable growth, streamlines operations, and safeguards stakeholder interests. The path forward lies in creating scalable, transparent solutions tailored to meet the demands of an ever-evolving market landscape.

References

McKinsey Global Private Markets Review 2024: Private markets in a slower era 
Global alternatives markets on course to exceed $30tn by 2030 - Preqin forecasts 
FCA Consults on New Private Stock Market