Top 13 Automation Use Cases in Private Equity in '24

With high interest rates, inflationary pressures, and a grim economic outlook, private equity firms must become agile to combat these economic devils. Automating core business processes in private equity, such as: 

• Data collection
• Due diligence
• Deal sourcing

via artificial intelligence technologies, can optimize crucial processes and improve the financial performance, transparency, and the efficiency of private equity firms. It can also help direct their investments in more profitable directions.

In this article, we will go over the top 13 automation use cases in private equity firms.

1. Due diligence

Conducting due diligence is learning about the organizations which you will be investing in. Leveraging web scrapers and alternative data (such as satellite camera images, social media sentiment, etc.) can provide an alternative vantage point into the organization’s day to day activities which spreadsheets alone don’t.

For instance, via satellite images, investors can assess the month-to-month growth in business activity of the project via congestion of the logistical fleet, people, etc.

2. Contract management

Whether it’s with the firm’s own employees, the acquired company’s managers, or financial intermediaries (such as investment banks), private equity firms manage lots of contracts. It’s time-consuming and dangerous (e.g.,a contract draft not reviewed by the legal team but mistakenly sent directly to the customer) to manually manage the contracts.

Contract automation solves these issues. Document processing tools can automatically draw-up pre-approved contract templates whenever a new client, employee, or business partner is added to the CRM or the ERP.

3. Reporting

Modern analytics solutions leverage OCR, NLP, computer vision, and ML tools to read through financial reports, understand their contexts and content, and automate the reporting.

For instance, a prospective company might provide an unstructured balance sheet of its last quarter’s activities. The analytical tools would read each entry, extract the data, and put it into standardized, company-wide templates for the analysis of private equity investors.

Learn more about how RPA automates reporting.

4. Analytics

RPA can improve asset management by automating the analytics processes. For instance, whenever performance data is sent by a portfolio company, the RPA bot can immediately extract the relevant data, pit it against the previous report’s performance, turn the tabular data into graphs, and add comments (i.e., “the quarterly growth rate has decreased compared to last month by X percentage points.”).

Research done by PWC shows that using robotic process automation (RPA) in financial reporting can lead to 20-40% time relief as opposed to doing it manually. Moreover, by establishing rule-based criteria, private equity firms can meet the compliance requirements.

Learn more about Extract, Transform, and Load (ETL).

5. Stress testing

Private equity firms can stress test their portfolio performance under “what-if” scenarios to realize how each asset class will be affected by different market conditions. Vendors offer this technology online. For instance, BackRock offers financial managers 30 artificial shocks to apply to their private equity investments to see how the portfolio companies will be affected.

The solution then automatically transports the results onto machine-readable PDF content. The insights can then be used in planning for risk diversification and mitigation. One of the way private equity firms can improve investor relations is providing a transparent overview of their exposed positions and possible consequences. Transparent, automated stress testing done by software robots achieves that.

6. Cash flow estimation

With a private equity firm having a diverse list of portfolio companies, it can be difficult to manually focus on each firm’s cash flow. A sustainable cash flow is a variable that is important for the short-term sustainability and long-term planning.

Modern financial accounting tools use finance APIs to interconnect processes, exchange financial data, such as the pending accounts payables, to conduct important financial calculations. The results are real-time overviews of the company’s cash flow. The as-is picture of companies’ current and future revenue streams helps for future planning. It could also be used in company valuation before private equity companies decide to invest.

7. Audits

Private equity firms, and their portfolio companies, have to submit yearly external audits to impartial accounting entities, just like public sector companies. These audits are usually fact-checking the financial statements that the companies give regulators.

Intelligent automation technology, such as RPA can extract data from one location and put it in another, as they appear in real-time. This makes regulatory filings error-free with minimal chances of data tampering.

In addition, with the rise of blockchain in auditing, no manual changes can be made without leaving a digital trace. These solutions lead to greater transparency and more efficiencies in auditing.

Learn more about intelligent automation in audit.

8. Anti-fraud checks

Private equity companies can use anti-money laundering (AML) and know-your-customer (KYC) solutions to ensure their current/future clients’ identities and accounts are in good order. Tasks such as ID verification, money source identification, and checking the customer’s name against politically exposed people (PEP) lists.

The benefit of automated KYC and AML solutions is their use of machine learning technology: Following increased interaction with data, they would predict the riskiness of a new customer.

9. Data management

Data management is one of the back-office business operations that could take up a significant amount of PE firms’ resources. In addition to financial metrics, PE firms should also track non-financial ones, such as ESG and cybersecurity reporting.

Automating the traditionally manual processes, such as data extraction and data wrangling, with intelligent automation tools can contribute to value creation. That is because by extracting information from different systems and providing the most up-to-date information to financial managers, including the:

• Real-time funding
• Equity amount
• Ownership allocations, etc.

managers can make strategic decisions and improve business operations.

10. Deal sourcing

Deal sourcing is finding a suitable company to buy. Done traditionally and manually, it’d require access to wide networks of brokers who would make suggestions for suitable investment options.

PE firms can use SaaS solutions, such as DealSuite, for online deal sourcing and investment deals. These solutions, similar to online dating websites, would ask private equity companies about their preferred investing strategies (e.g. leveraged buyouts, etc.), risk threshold, and other factors. It’d then match the suitable sellers with buyers quickly.

11. Mergers & acquisitions (M&A)

There are use cases in mergers & acquisition processes that could benefit from automation. RPA, for instance, can help in scheduling welcoming meetings with the acquired company’s staff. Digital workers can help move the purchased firm’s data from their systems into the private equity company’s consolidated database.

12. Onboarding & offboarding

PE firms can automate their employees’ onboarding and offboarding processes. Tasks such as disabling login credentials and access to confidential data can be automated with RPA. In onboarding, contract management automation will result in the new employee starting work quicker, and the paperwork will be processed faster.

13. Wage and compensation payments

Payroll automation will result in on-time payments to the employees. For compensation packages for the:

• Outgoing staff
• High level managers
• Associate director of the acquired company

RPA can automatically make the important financial calculations. For instance, rule-based scripts could be written that a division manager would be paid six months’ worth of wages in compensation. By cross-matching their name with their monthly salaries and multiplying that by six, RPA bots can ensure outgoing employees’ satisfaction and establish fair, unbiased compensation processes.

For more on Fintech

To explore other FinTech solutions’ use cases, read:

• 5 Ways Expense Management Automation Can Help Businesses
• Top 4 Benefits of Automating Your Tax Returns
• Top 6 Accounting Processes to Automate With RPA

And if you believe your enterprise would benefit from a FinTech solution, we have data-driven lists of FinTech providers for various use cases.

We will help you choose the best tool:

Find the Right Vendors

This article was originally written by former AIMultiple industry analyst Bardia Eshghi and reviewed by Cem Dilmegani