Faced with historic low-interest rates and equity markets at all-time highs, allocators are directing record capital flows towards the world’s private markets. But, for the asset managers racing to capture those flows, there is no easy money.
The surge in allocations has been accompanied by an uptick in manager responsibilities and servicing expectations. Investors and regulators call for similar levels of support and operational rigour to those seen in traditional markets. But, without the right operational infrastructure to meet those demands, managers will struggle to succeed.
On the rise
Latest Preqin figures show the number of private equity and venture capital funds continue to hit new highs, while a record swathe of funds seeks to raise additional capital. Similar trends can be seen in private debt markets, where the number of funds and their capital targets have doubled since January 2017, drawn by the attractive yields on offer.
However, many private market participants lack the technology and integration to automate and streamline fundraising, client onboarding, accounting, payments, reporting, asset servicing and administration, explains Nakis Efstathiou, Senior Director, Solutions Management EMEA & APAC at SS&C Advent.
“The legacy technology that investment organisations use often can’t keep pace with the new investment products. The lack of technology investment creates a major challenge for the operations teams that have to record, account and report on these unsupported asset types,” says Efstathiou. “Firms frequently end up using Excel or bespoke developments to manage the business. They then have to depend on manual processes to monitor and reconcile the data, ensure the accounting is correct, search for valuation information, and so on. As a result, they struggle to provide consolidated reporting and responsive client servicing.”
Complex and growing demands
Investor demand for accurate, up-to-date, often bespoke reports on all aspects of their investments, including fees and returns, will only continue to rise. Allocators want transparency where the manager invests, the portfolio constituents and their performance, the value of their invested capital, and how much and why they are charged a specific fee. They also want opt-in/opt-out capabilities on investments. And they no longer expect to wait for a paper statement to arrive once a quarter.
Such demands are impossible to meet in a non-automated environment. Manual inputs and workarounds drive up costs and escalate the likelihood of data errors. Using multiple systems that lack the dedicated functionality to manage alternative asset portfolios likewise magnifies firms’ costs and creates processing siloes that impact downstream reporting and client servicing. Firms also become dependent on key staff. As a result, operational and reputational risks rise.
“Allocators, especially institutional investors, want proof the investment manager has the capabilities to monitor, control and mitigate market and operational risks, regardless of asset type,” says Efstathiou. “They want to see controls in place to guarantee the accuracy, timeliness and integrity of the numbers produced. And they want transparency, with clear, frequent, customised position and performance reporting. Unfortunately, one missed checkbox on the operational due diligence report is enough for a fund to be vetoed before it can even explain its investment strategy.”
Integrated automation
To tap into the allocation trends and satisfy investors’ servicing demands requires breadth and depth of expertise and technology functionality. In addition, robust infrastructures and processes that minimise investment and operational risks reassure investors and give managers the flexibility to compete in new markets and adapt to clients’ evolving expectations.
The solution is an integrated technology stack that combines comprehensive instrument coverage with the ability to handle open-, closed-end and hybrid funds, allowing managers to support all their investment strategies in a single environment. In addition, such a solution optimises internal efficiencies, fosters enterprise-wide data consistency, enhances risk oversight and reduces costs—all of which strengthens the firm’s competitive edge.
But that is easier said than done. Systems providers need to possess expertise in the alternatives arena, understand the processing challenges, and devote significant and ongoing investment to develop solutions with the requisite capabilities. Few can.
“The liquidity profile of private equity, private debt and real estate means assets need to be held in the right vehicle; hence, the surge inflows into closed-end and hybrid funds,” says Efstathiou. “Ensuring the integrity and timeliness of accounting data in open and closed periods, and accurately allocating profits, losses, expenses and tax impacts among multiple investors, with the reporting to match, is vital.”
To excel in today’s competitive market, “Systems need to process capital calls and distributions, track investor notional balances, and calculate management fees on multiple bases. In addition, the system should be able to produce waterfall calculations, calculate and report on investor and fund XIRR, track and account for investor opt-ins/opt-outs, and process multiple subsequent closes,” Efstathiou adds.
Reliable partner
SS&C Technologies has been a leader in the alternative assets space for many years. Leveraging that experience, the firm has created integrated, automated, truly multi-asset class platforms, such as Geneva, enabling managers to expand and diversify without bulking up operating costs.
“Our proven solutions are widely accepted as the industry’s best,” he says. “But we can always improve and are continuing to invest in taking the technology where users need it to go. As part of the larger SS&C family, we can also combine technology and complementary support services in areas such as fund administration and regulatory reporting to deliver the operational efficiency, data accuracy, and high-quality client servicing asset managers require.”
By relying on a trusted partner, managers can then focus on the critical tasks of managing investments and supporting clients, notes Efstathiou, rather than worrying about the day-to-day operational underpinnings. 
