Industry
Capital Markets
Unlocking Exponential Future Growth in Capital Market Firms
Highlights
- The private capital industry is set to revive in 2025 driven by the huge amounts of capital they hold, but at a slower rate.
- Private capital firms must launch targeted initiatives across key business facets to take advantage of the opportunity.
- Firms must also leverage artificial intelligence (AI) technologies to generate alpha by transforming their operations across deal generation, due diligence, capital management, investments, and portfolio management.
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Industry overview
Despite economic uncertainty, the impending tariff war, and fears of a slowdown in some geographies, the global economy is in better health now than a year ago.
The year 2024 witnessed firms grappling with several challenges including geo-political conflicts resulting in overall sluggishness in fund-raising across the spectrum of private capital. While there are indications of a revival in dealmaking and exits, the pace is slow, and the size of unspent capital is still growing and aging. Given intense competition and thin margins, private equity firms are under pressure to deploy the huge amounts of capital they hold.
Funds focused on commercial real estate are yet to revive given they are facing prolonged liquidity strain and capital crunch mainly due to lower occupancy and subdued overall demand. Funds invested in the residential and data center segment, on the other hand, have registered an uptick, making them one of the fastest-growing sub-sectors in real estate investments.
In the wake of the 2023 banking crisis and credit restraints in the US and Europe, private credit has emerged as an attractive alternative source of lending. It has also created new investment opportunities for special classes of investors and traditional pension and insurance asset management companies. The industry hopes to see revival in 2025 with improved valuations and a rebound of IPO markets to support exits from long-held assets. To take advantage of such upcoming opportunities, private capital firms must leverage artificial intelligence (AI) technologies and embrace a data-led mindset, enhancing agility and operational resilience.
What firms must do
Given unpredictable interest rates and volatile markets, private capital firms have limited maneuvering space to realign their business strategies and rebalance portfolios.
Balancing the risk-return trade-off and improving portfolio returns remain top priorities in an uncertain investment environment. At the same time, retaining market leadership through product innovation and operational agility are critical to staying ahead of the competition. Private capital firms must take targeted action across some key dimensions to drive growth, enhance customer engagement, and increase operational efficiencies, and firms must explore the following avenues:
Strategic refocus: Diversify portfolios by including non-traditional investments, new markets, and multi-horizon funds to create varied revenue streams and liquidity flow patterns.
Investment strategy: Adopt an agile investment strategy with emphasis on time-sensitive investment cycles. Ensure swifter profiling and insightful screening of deal flows as well as rigorous due diligence and targeted value-creation initiatives.
Distribution: Expand distribution network to new investor segments and offer customized investment vehicles and structures that align with their portfolio diversification needs, optimizing risk profile to enhance returns.
Portfolio management: Drive value creation for portfolio companies through rigorous operational discipline and proactive risk and performance monitoring.
Governance: Standardize operational processes across jurisdictional and asset-class specificities, funds, and family structures. Simplify administrative and accounting processes to improve auditability and transparency, fulfilling regulators and investors’ expectations and enhancing efficiency and control.
AI for alpha
Catering to investor needs requires hyper-personalization across deal terms and offerings to ensure alignment with individual risk profiles and expected returns.
It demands factoring in complexities of disparate fund structures and hierarchies as well as asset servicing, accounting, and reporting requirements while defining investment strategies.
And here’s where the transformational potential of AI can be a boon to private capital firms. Several areas of the private capital landscape can benefit from the application of AI: deal pipeline screening, due diligence, capital raising, investment strategy, portfolio allocation, portfolio risk and performance monitoring, to name a few (see Figure 1).
Figure 1: AI interventions to enhance the private capital value chain
Let us examine how AI can have a transformative impact on the operations and functioning of private capital firms.
- Intelligent automation for enhanced in-house technology platforms and seamless integration of partner-sourced services.
- Analytics tools to enable swift and informed decisions, improving business outcomes and allowing firms to capitalize on opportunistic investment opportunities to generate alpha.
- Agility in middle-office and better integration of information from back-office, enhancing productivity and enabling investment managers to make timely decisions.
- Expansion into new asset classes and market segments resulting in increased business footprint.
- Product and service innovation and hyper-personalization resulting in better engagement with new investor groups.
- Higher operational resilience across investor onboarding, deal processing, middle-office functions, fund management, investment and financial accounting, investment operations, client and regulatory reporting, and customer relationship management (CRM).
- Superior operational capabilities across reconciliation of deal terms and covenants tracking, capital flows and liquidity forecasts, asset valuation appraisals, fund and investment accounting, and net asset value (NAV) disclosures for varied investments.
- Better control through accurate prediction of earnings and profit or loss based on macroeconomic events and market dynamics, simulation of return of capital and capital gains, management fees, carried interest, and tax estimates.
- Enhanced content management through customized marketing collateral and standardized communication templates for a variety of use cases.
Fixing the data conundrum
Ad hoc AI initiatives or point solutions to address processing bottlenecks for short term gain will have limited impact.
Successful adoption of AI in private capital firms will require a strategic approach with emphasis on robust data management.
AI is heavily dependent on data, and the well-synchronized functioning of different facets of the data landscape such as data foundation, data engineering, and governance as well as efficient management of the data lifecycle across metadata, lineage, and observability are key to meaningful business outcomes. Private capital firms must therefore:
- Break down the data silos across functional domains and legacy systems.
- Ensure availability of integrated data from internal and external sources.
- Enhance data ownership frameworks and governance practices to enable a future-ready architecture and fit-for-purpose data ecosystem in both cloud and on-premise environments.
- Ensure active collaboration among data owners, business groups, data scientists, and external partners.
- Enable superior data discovery and experimentation by leveraging advanced AI and machine learning (ML) tools, self-design studios, open-source and third-party analytics models, visualization tools, and workbench enablement.
- Install comprehensive guardrails to safeguard against AI model risks and establish governance mechanisms to build trust, transparency, and explainability.
So, how can private capital firms address the data issues and set the stage for speedy AI adoption? How must they revamp their existing data infrastructure to make them AI-ready? In our view, private capital firms must rehaul their data architecture and processes by:
- Strengthening the data operating model to enable assimilation of new data sources, intelligent processing, and distribution.
- Modernizing legacy data platforms to increase scalability, agility, and resilience to improve data quality, security, and governance.
- Deploying AI, generative AI, (GenAI) and machine learning (ML) solutions that offer the capabilities needed to explore, pilot, and adopt advanced analytics, data science techniques, data visualization and knowledge graphs, and quantitative modelling use cases.
- Promoting a culture of data-driven innovation by improving data literacy through collaborative guilds and self-discovery tools to explore innovative use cases and unlock new business value.
- Designing domain-centric data architecture to drive data product mindset; orchestrating ecosystems and onboarding partners from different functions and industries to support collaborative value creation.
- Capitalizing on data monetization opportunities to create new revenue streams, value added services, and co-create offerings by collaborating with ecosystem partners.
Get ready for AI times
The potential of AI to radically transform the private capital space is unprecedented.
Moreover, with the new breed of specialist investors increasingly seeking tech-savvy firms to meet their investment needs, treading the AI path has become a business imperative for private capital firms. Success will depend on identifying the right value creation opportunities and overcoming challenges, especially around data. Earlier the better, for firms that act quickly and build a robust AI foundation along with futuristic data platforms stand to unlock huge gains in the coming years.
