Automating Private Markets With People at the Core

January 13, 2022
  • Investor Services
In this series, we explore how automation can enable firms to scale by giving technology toolsets to subject matter experts to develop use cases for the low volume, non-standardized servicing activities.

Ainun Ayub explores the importance of evolving the mindset and skills of people to extract the full value of new technology and scale to keep pace with the growth in alternatives.

The industry is seeing demand for private market investments continue as returns from listed, more liquid assets remain uninspiring. Many alternatives asset managers have experienced unprecedented growth, while others are dipping their toes into less liquid waters. With this growth comes the demand for more modern operations management, technologies and practices.

But asset managers who offer the most illiquid portfolios report low levels of automation across key business functions, according to a survey by EY (see Figure 1).1 This is because these portfolios, which range from direct investments in the equity or debt of private companies, infrastructure projects and real property assets to indirect funds holding these investments, are difficult to automate due to their low volume and high complexity.

Figure 1: The Level of Automation for Processes that are Currently Conducted In-house

Source: EY Survey, 2020

This graph in an Ernst & Young Survey report in 2020 shows the following levels of automation across key business functions: a lack of automation in Marketing and investor relations functions across the hedge funds and private equity segments; an equal mix of manual and automated operations in Compliance and regulatory reporting functions across the hedge funds and private equity segments; some degree of automation in Tax, Valuation and Middle Office functions in private equity at the lower end and hedge funds at the higher end; while Fund Accounting is the most automated function within both hedge funds and private equity. 

In this article series, we share our experience of how operations can be automated to take the headaches out of executions management, provide an outstanding investor experience, and utilize new technologies to automate depositary oversight.

Illiquid asset operations are challenging, but changing

The digital and data evolution of the private markets businesses is well underway, accelerated by the new reality of mass remote working within the funds industry.

At its core, a private transaction realizes maximum value by negotiation between a buyer and seller. Given the private markets space is all about low-frequency, bulky, complex, and highly customized activity, the solutions needed to scale are closer to those in consumer technology than the industrial standardization and automation methods used in the public markets space. And if you’re tempted to think we can make the whole ecosystem conform to one data set and one way of working, that’s like saying everyone needs to use the same vehicle to get from point A to point B.

That said, the potential for automation is enormous. Given the complexity in private markets, it should be done in a way that acknowledges the inherently bespoke nature of the business, wrapping the technology intuitively around a variety of business users, so that the right combination of complex data is accurately presented as useful information at just the right time and, increasingly, on demand. This approach merits careful consideration of the three core themes, set out below.

Managing operations in alternatives – 3 core considerations

1. Embracing digital

Mass remote working has accelerated the need to digitize interactions, communications and workflows, but the real value to be gained is from organizing the information collected into re-usable data. Complex, bespoke transactions are document-heavy, so receiving, processing, and storing huge volumes of highly variable PDFs in a shared central location creates one type of efficiency. Understanding and extracting the data is still very manual due to the high variability of information required. Storing it in a database or inter-connected databases is the aspect most businesses focus on. Sharing these between multiple stakeholders who need different evolving data sets curated at different times is the crux of the data challenge in this ecosystem.

Understanding all this needs people who are data literate, and open to implementing and using low code, no code tools to customise core processes.

2. Understand that data flows like water

Understanding, capturing and transferring complex information is not easy, and people dealing with bespoke transactions have developed all sorts of different terminology and ways to process these.

Simply put, one reason why private markets are difficult to standardize is due to the variability of firms, some of whom are:

  • Organized around a few people who have responsibility for all investor, fund and investment activity end to end;
  • Functionalized, where portfolio managers, accountants and investor relations specialists have varied production cycles and different but overlapping perspectives on fund transactions and cash movements;
  • Focused on one investment strategy. They are stretched across a liquidity spectrum for instance, from private debt to syndicated loans to fixed income. Diversified managers or asset owners cover all private market asset classes, for direct deals, indirect fund of funds, and co-investment activity. Some do a lot of work in-house, some outsource, some are big adopters of fintech, many are not.

Like water, data flows from each activity, permeating through multiple interactions to be packaged up repeatedly and consumed by different stakeholders. Almost all of them need to blend data from multiple sources for decision-making and (regulatory) reporting.

Whatever the need, there is a distinct shift towards thinking and working in terms of data sets and mapping across multiple systems and often across multiple products, e.g. private equity with private debt or real estate with infrastructure strategies. Success depends on the will and drive to:

  1. Break down product and functional silos and understand who needs what data and when;
  2. Simplify the data architecture into as few systems as possible and stitch together harmonized and flexible data sets; and
  3. Build the capability to aggregate, flow and analyze data via multiple pathways using existing data transfer tools, new API fluency, and most enticingly, emerging AI and machine learning capability for complex documentation and behaviors.

3. Give power to the people

Shhh, don’t tell anybody, but emails and Excel are still a mainstay of day-to-day activity. Why? Because they allow different types of users to customize their own communication and processing experience in a highly bespoke way, and at any time at the user’s own choosing.

True scalability in private markets must include an embedded nimbleness to accommodate constant change, e.g. a communication tool that can capture data interactions for a multi-billion-dollar fund for multiple investors as well as a bespoke negotiated mandate for a large institutional investor. A (r)evolution of clever, no-code tools is underway to give users the power to automate and customize their day-to-day activities easily as things change, while knitting them together in a flexible, yet controlled, organic mesh of the activity and data required by, or connecting, bigger production systems. We call this democratized automation.

This approach to automation underpins the evolution of private markets and happens in three streams.

Evolution – from email and Excel to a data-fluent framework

First, digitize these complex and variable interactions – market participants are implementing a plethora of flexible workflow tools, communication apps, and fintech platforms to do this. It will not be long before APIs will be de rigueur so all these platforms can talk to each other without the whole ecosystem needing to standardize to one format.

Second, capture and show the data – again, core data sets need to be capable of being augmented almost at will, with reporting or dashboarding tools that can also flex quickly, with controls and the discipline around data lineage and drillable summary, so the output can be trusted.

Third, make it easy for frontline people and different groups of stakeholders, so they can automate away manual tasks to focus on value added work: think customizable apps that users can decide what makes most sense to use, make it easy to change things on demand, in a controlled, transparent way.

The relationship between people and technology in private markets is transforming rapidly – are you?

In the next article in the series, we explore how managers can automate to achieve a bird’s eye view of executions across their portfolios, facilitating investor access to private market assets. 

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Up Next
Up Next

Smarter Depositary Services: Empowering the People

How is an automation crusade in depositary services arming leaders with the tools to reduce complexity and manually intensive processes in alternatives investing? We explore new technologies that are underpinning this efficiency revolution and their potential to transform the industry.

1 https://www.ey.com/en_gl/wealth-asset-management/does-accelerating-adaptation-present-obstacles-or-increase-opportunities

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