Institutional investors stand to unlock returns of up to 10 times their investment by adopting technology and artificial intelligence (AI) more strategically, according to a new report from McKinsey & Company. The report, titled “Unlocking Value from Technology and AI for Institutional Investors”, outlines how asset managers, pension funds, and sovereign wealth funds can drive returns, streamline operations, and strengthen risk management by leveraging digital transformation.
The study arrives at a time when institutional investors are facing growing pressure to generate higher returns while keeping costs under control. McKinsey argues that for many institutions, technology adoption is no longer a matter of choice but a prerequisite for staying competitive.
AI to Drive Investment Alpha and Operational Efficiency
The report estimates that effective use of technology—particularly advanced AI—can create a return on investment (ROI) of more than tenfold. Institutions deploying AI in areas such as deal sourcing, risk analysis, and operational efficiency are already seeing gains.
For instance, a North American pension fund cited in the study has implemented a proprietary generative AI model that enhances investment research and internal analytics. Within a year, the fund saw a measurable increase in efficiency and decision-making quality.
Investment in Technology Is Rising—But Unevenly
While most institutional investors have increased technology spending, McKinsey finds that investment levels vary significantly. The average spend among large institutions is 1.3 to 2.7 basis points of assets under management (AUM), or roughly $20–40 million annually for a $150 billion fund. However, the top 25% spend more than 3.5 basis points—often tied to a greater share of in-house management and advanced digital infrastructure.
The report notes that top-performing investors are going beyond legacy system upgrades and are building integrated digital platforms, adopting agile models, and embedding data science into investment teams.
Roadblocks to Transformation
Despite the optimism, challenges remain. Only about 20% of institutional investors surveyed said they are “tech-ready” for integrating next-generation tools into daily operations. Many firms still rely on spreadsheets, emails, and siloed systems, limiting their ability to scale or manage complex asset classes such as private equity or infrastructure.
Key barriers include outdated infrastructure, lack of unified data platforms, and underdeveloped in-house tech talent. The report also highlights that while generative AI offers breakthrough capabilities, most institutions have yet to deploy it effectively.
A Six-Step Roadmap for Investors
To help firms close the gap, McKinsey outlines a six-step framework that includes aligning technology goals with investment objectives, modernizing IT foundations, reimagining platforms, building minimum viable products (MVPs), and fostering cross-functional tech talent.
It also calls for tighter change management, stressing that technology adoption must be accompanied by cultural and organizational transformation. Institutions that prepare users early, train investment teams on AI tools, and support iterative development tend to see better adoption and sustained impact.
Also read: Bengaluru Emerges as Global AI Talent Hub
India’s Potential in the Transformation
Although the report focuses globally, its insights are highly relevant to India’s growing institutional investor base. India’s pension funds, insurers, and sovereign funds are increasingly expanding into private markets, and many are grappling with similar tech readiness issues. The report’s emphasis on leapfrogging via AI—especially generative AI—presents a cost-effective path for Indian investors seeking to modernize without building full-scale infrastructure upfront.
