Richard Robinson, CEO of Robin AI, outlines the ways AI is revolutionizing investment reporting
Regulation usually lags technology, but particularly in times of rapid innovation. However, new regulations introduced last year by the US Securities and Exchange Commission (SEC) are proving to be one of the greatest drivers for the use of technology we’ve ever seen in private markets. In the face of expanded investment reporting and disclosure requirements, fund managers are turning to new generative artificial intelligence (AI) technologies for help.
Under the new rules, private equity firms must provide a detailed investment report each quarter on their portfolio companies, including metrics on revenue, debt, valuation, fees, and expenses. Private funds will have to disclose preferential terms offered inside agreements to all investors.
Up until now, many fund managers have relied on manual and expensive methods to track their SEC regulation obligations and meet the investment reporting requirements. External counsel is often retained to manually track obligations in excel spreadsheets, for example, but this kind of approach will likely no longer be feasible given the breadth and depth of the new rules. Private funds are turning to AI to meet these new SEC regulations.
Extracting, aggregating, and analysing data is also exactly what AI does well and is getting better at exponentially. Similarly, large language models (LLMs) that have been trained with relevant data can understand entire document repositories and quickly pull insights from them.
Take the side letter, which has been growing in prevalence among private funds in recent years and is already a major pain point for funds to track and manage. Once the new SEC regulations come into effect, every new preferential provision contained in a side letter will need to be disclosed to every investor. This will be especially arduous during the fundraising closing process where GPs must carefully track and communicate what’s being offered to every LP. Excel spreadsheets are simply not up to this task for this type of investment reporting.
An AI-powered system, however, that has been trained to understand the terminology of contracts and side letters, will allow fund managers to find the information they need across all of their agreements in just seconds, while also powering dashboards to easily track, manage, and comply with provisions that have been offered.
AI will also likely transform the time-consuming task of completing due diligence questionnaires. Previously, teams would manually pore over hundreds of historic documents, scouring each one for relevant information. Now, AI programs can instantly query the data to supply investors with relevant information, speed up processes, and help strengthen relationships between GPs and LPs.
Finally, there are AI tools available that will improve the way in which funds track performance, including valuing their portfolios. The new SEC regulations detail and segment operational data by breaking it down by a range of categories, as well as fair valuations of their holdings each quarter. AI tools will be able to quickly extract these data points, detect trends and patterns across the data, and automate aspects of the valuation process.
The SEC's push for greater transparency is spurring a revolution in the private markets’ use of technology. Private capital has not traditionally been an early adopter of technology but is currently embracing AI for its clear and tangible opportunity to cut the cost of compliance while increasing operational efficiency.
About
Richard Robinson is the CEO of Robin AI, a leader in legal AI for private markets. Richard is a corporate lawyer turned entrepreneur who previously worked at global law firms like Clifford Chance. Built in partnership with Anthropic, Robin AI combines LLMs with proprietary machine learning models, data, and deep legal expertise to transform the way that private capital firms handle their contracts and obligations. The secure technology is trusted by market leaders to manage confidential documents like side letters to help mitigate risk, improve investor relations, and reduce administrative burden.
This article originally appeared in Alternatives in North America 2024. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Robin AI accept no liability for any decisions taken in relation to the above.