How fund operators can execute private markets strategies
Dan Sharp, Partner at management consulting firm Sionic, explores some of the potential big issues for fund operators in the private markets space.
Andrew Putwain POSTED ON 4/22/2022 2:21:04 PM
Andrew Putwain: How can funds get around the issue of private markets being a resource-heavy endeavour that means hiring large numbers of people?
Dan Sharp: Some of it comes down to the appropriateness of technology. Where firms are investing across multiple asset classes within private markets – private equity and private credit, real estate, infrastructure – it is difficult to find single technology solutions that can cater for the complexities of all the different individual assets that sit within all those asset classes. What that means is needing to embed a technology solution, and, over time, there will be manual workarounds that spring up, and proliferation of Excel spreadsheets to deal with complexity in the products versus capability of technology, particularly where those kinds of unstructured data proliferate.
"It comes down to the right deployment of technology, outsourcing boundaries, use of third parties, and having clear lines of responsibility"
Some of it is around the extent to which companies try to roll out 'broadest of breed' technology solutions or other operating elements, which might result in compromises in capability, and retention of legacy manual processes, versus the extent to which you would go best of breed and procure a suite of different technology or outsourcing solutions.
This leads to the challenge of managing multiple parties, integration, and consolidation of data. It comes down to the right deployment of technology, outsourcing boundaries, use of third parties, and having clear lines of responsibility.
Andrew: Solutions in private markets can be separate for asset classes – and individual assets – how should a fund operator go about this in a resource-efficient manner?
Dan: It is a key strategic decision - best of breed versus harmonisation?
At the corporate level, there are lots of benefits of harmonisation, balanced off against giving private markets front office and operations the best tools possible. The best place to end up is a hybrid, at least at the moment where there might only be certain functions or activities or teams that can be harmonised. There will likely be pockets where a best of breed approach is needed.
Andrew: How is the vendor landscape changing and what this will mean going forward?
Dan: Private markets have been a big growth area for the industry and continue to be so. As a result, the technology and other vendor solutions in the market are also evolving. We have seen consolidation, both in terms of specialist service providers, and also technology.
All of the major players are investing in actively building their service offerings. Service providers are starting to extend up the value chain and sell front office technology alongside their middle and back-office services in common with public markets. At the moment though, there are limited examples of clients where those front to back offerings have been fully deployed.
"For asset managers and owners, the challenge is keeping up to date with market developments, being aware of who is out there, and then understanding how best to deploy that within their businesses"
The market is also developing as firms acquire or develop new service lines in areas like loan closing, data consolidation and ESG offerings. Service offerings are broadening and we are seeing new platforms come to the market.
In terms of technology, platforms that are designed for a particular thing - like administration of private equity funds - but based on newer cloud-based technology are out there.
For asset managers and owners, the challenge is keeping up to date with market developments, being aware of who is out there, and then understanding how best to deploy that within their businesses.
Andrew: In the next five two-to-five years, what will the big issues for fund operators (especially for Chief Operating Officers) in the private markets space be?
Dan: Scalability and robustness of operating models, data management, access to data and ensuring the front office is being serviced in the best way are all big themes - against the backdrop of an increasingly diversified and complex asset base.
"If you rely on a manual set of processes without a defined data or operating model, then ad hoc requests that come in, or providing information to clients more frequently can be operationally challenging"
Some steps can be taken to address these challenges. If steps aren't taken, the challenges are only going to intensify. More broadly we are seeing a trend towards almost retailisation, you could see it going that way with private markets investments being increasingly packaged into more liquid structures and offered in a more retail-like form in one way or another. That brings with it a whole load of challenges in terms of liquidity and operational challenges.
Then there is the increasing demand for the transparency and frequency of data, reporting, and information from investors. If you rely on a highly manual set of underlying processes without a defined data or operating model, then those types of ad hoc requests that come in, or providing information to clients more frequently can be very operationally challenging.
Finally, like any other area within our industry ESG is a very hot topic. Getting access to the ESG data, getting it into the operating model, being able to incorporate it into the investment decision making process, reporting to clients, is an evolving challenge. The industry is mature, but it is still developing and in 10 years, it will look quite different from how it looks today.
This part two in the conversation, to read part one, click here.
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