When I started managing money in 1984 Chicago, people made a living out of yelling across the exchange floor. The room was perpetually in a state of frenzy; well-dressed professionals shouted instructions to colleagues poised over landlines and notepads, while runners darted in and out of the trading pits to ferry paper tickets between the two groups. It was somewhat-organized chaos — not the most efficient process, but the most effective one that investors could put together with the resources and technology they had available.
Today, the cacophony has gone mute. There are no shouts from well-dressed professionals in rumpled suits and trading jackets, no clacking landline telephones, and no footsteps from runners snatching at dropped tickets. The exchange floors in Chicago, New York and elsewhere still host a low bustle of conversation, but the freneticism is gone. We’ve evolved to high-frequency algorithmic trading (roughly 70% of US trading) and procedures that utilize smart systems to parse big data and blaze through the fundamental work that traders used to trundle through manually. Technology creates a smoother flow for information and order, empowering financial professionals to speed ahead to price without getting bogged down in the fundamental tasks. True, there are still some talented managers who continue to do that legwork themselves and thrive, but for most, success hinges on keeping abreast of the latest industry innovations — whether they recognize it or not.
Chart 1 and 2 – Source: Morton Glantz, Robert Kissell; Chart 3 – Source: Thomson Reuters
The sector rarely embraces technology’s aid immediately or wholeheartedly. It takes time to change an accepted system; at one point, it might have seemed absurd to think the exchange floor wouldn’t run on dropped tickets and shouts — but of course, widespread adoption of new technology eventually ensured the shift.
A similar transformation is happening in the private equity sector. Historically, private equity deals have been network-driven and investment broker-led, relying on countless phone calls and time-consuming conversations rather than quick information exchanges. Investors in the field often need to review confidential business data in a shortened timeline in order to make informed investment decisions and place their bid within an auction process — but given its sensitivity, accessing that information can be a time-consuming and inefficient process that drags out critical choices. However, new technologies may offer a means for private equity investors to avoid the usual data-sharing slog and make informed decisions quickly.
By harnessing data and analytical tools, private equity fund managers can identify opportunities, improve a business’s operational metrics, and source potential investors far faster than manual work allows. Blockchain could create a shared interface between private equity fund managers and businesses that enables secure, instantaneous information-sharing. All parties involved would have the ability to edit, store, and verify transactional data in real time; this capability would empower portfolio companies to cut out the majority of time-consuming phone calls and ensure more efficient communications.
Blockchain’s potential has so far been relatively untapped by the private equity sector; however, some forward-thinking firms are beginning to take advantage of the emerging technology. Consider Northern Trust — the Chicago-based private equity firm is currently riding the cutting edge of the industry, having been the first to implement blockchain for the private equity market. Since incorporating the technology in 2017, the firm has seen strikingly positive results.
As Justin Chapman, Northern Trusts’s Global Head of Market Advocacy and Innovation, pointed out in an article for Financial Advisor Magazine, blockchain is, in many ways, an ideal platform for private equity. “[Blockchain] creates ecosystems and collaborative environments, databases with shared records where everything recorded becomes one version of the truth,” he notes, “We have complex transactions that require trust and legal certainty, and this is database technology that allows trust to be inherent in the process rather than bilaterally agreed upon between two parties.”
In other words, blockchain empowers private equity professionals to leave the metaphorical tickets on the floor; it allows them to conduct deals with greater trust, clarity, and efficiency. It’s a supportive technology that stands to revolutionize the “normal processes” of private equity investing just as surely as digital systems did the exchange floor.
If a fund were to be built around the capabilities of big data and blockchain technology, its performance would likely change the industry playing field and set the stage for a new evolution of the private equity sector. However, that fund will likely remain hypothetical for a few years, given that the talent required for such a fund is mostly inaccessible to private equity managers. Blockchain engineers currently tend to gravitate towards high-profile — and high-paying — firms like Facebook and Google.
According to a 2018 report conducted by San Francisco-based tech recruiter Hired, demand for blockchain engineers has increased by 400% since late 2017. Their salaries have shot up alongside need, with blockchain engineers now making between $150k and $175k annually — well above the $135k that an unspecialized software engineer might make. True, some engineers might sign on with tech-forward financial whales like Capital One — a company which recently filed a blockchain patent for a new “collaborative authentication tool” — but most probably will not settle for working at a small private equity firm when higher-paid roles at large companies are available. Thus, the private equity field is on a middle ground. While many describe themselves as data-driven, their work nevertheless ends up being a predominantly manual process — one sped, but not fully supported, by technology.
Make no mistake, though; change is coming. While the private equity sector is not yet in a position to wholly embrace innovations like data analytics, AI or blockchain, it soon will be — and when it does, industry professionals will need to be ready to incorporate them into their daily processes. If they don’t, their tried-and-true tactics — the ones we consider “normal” now — will eventually come to seem just as dusty, inefficient, and unnecessary as holding a ticket on a digitally-powered exchange floor.