Aug 11: Most private equity fund managers do not have formal policies for the use of AI in compliance despite using it widely for regulatory reporting on deals, new research* from Ocorian, a leading U.S. and global asset services provider, shows.
The study, which surveyed private equity fund managers across the U.S. and Europe collectively managing $3.511 trillion, found just one in 20 have policies for the use of AI in compliance and regulation, compared with nearly nine out of 10 (89%) who have formal policies on the use of AI for investment decision-making. However, 69% say AI is used for compliance and regulatory reporting in relation to deals and decision-making, Ocorian’s study across all key U.S. markets, and in the UK, Switzerland, Germany, Italy, Spain, Poland, Sweden and Bulgaria, found.
AI adoption is outpacing governance
In fact, AI is most widely used for compliance and regulatory reporting, the research found. Around 57% questioned said they used AI for portfolio monitoring and performance analytics while 44% use AI for due diligence and data analysis and 41% for investor communications and LP reporting.
Not all firms questioned have integrated the use of AI into investment deals and decision-making – around 37% saying they are piloting AI tools while 1% said they were not using it at all.
Legacy systems and cybersecurity remain major barriers
One of the challenges of adapting processes to incorporating AI may be due to the prevalence of legacy systems within firms. 70% identified the integration of new technology with legacy systems as their biggest technology-related compliance issue for the next two years.
The findings also highlight a broader concern around how AI will be governed once it is in place. Nearly six out of 10 (57%) said adapting AI to governance requirements will be the biggest challenge, while 56% highlighted cybersecurity requirements and data protection with 50% identifying pressure to keep up with regulatory requirements for digital infrastructure. Cost appears to be less of a barrier, with just 28% pointing to the cost of compliance technology, such as RegTech platforms.
Abi Reilly, Partner, Regulatory & Compliance at Ocorian, said: “Given the widespread use of AI by private equity fund managers it is concerning and surprising that so few have adapted formal policies for the use of AI in compliance.
“Most firms have recognised the need for formal policies covering its use in investment decision making and that should also apply in compliance as firms expand their use of AI across business functions.
“Cost does not appear to be a major issue with firms willing to spend, but legacy systems may be a stumbling block. In light of the technology challenges being faced there is a strong argument for private equity fund managers to seek outside support and expertise.”