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How do you win in private markets? In fact, what does that look like?

At a roundtable earlier this year in New York, participants looked at one of the biggest issues facing investors today: the rise and rise of private markets, and how to get ahead of the curve without breaking the bank or your operations team.

The conversation now forms part of our new report "Winning in private markets: how to boost efficiency to enhance margins and scale with demand". The report is free and available to download.

Moderated by Russell Newman, the Former Chief Operating Officer at Rothschild & Co. Asset Management, and with representatives of the sponsor SS&C, too, the roundtable covered some of the big issues facing the market. Representatives from some of the major investment firms in North America – including Adam Street Partners, Angel Oak Capital, Citymark Capital, SKK, Prosperity Asset Management, and PSP Investments took part.

“Three years ago, we had almost no private credit. But now, private credit accounts for roughly 25% of our portfolio, and [our] legacy system no longer meets our needs."

The panellists were asked whether it made sense to have an OMS specific to an asset class or a holistic system that can deal with a range of asset classes.

This has been an ongoing debate for years, but with the new push from the rise of private markets, it might be time to come up with an answer.

“Three years ago, we had almost no private credit. But now, private credit accounts for roughly 25% of our portfolio, and [our] legacy system no longer meets our needs,” said Rich Gordon, Controller, Prosperity Asset Management.

Gordon went on to say that “The right system depends on your target operating model and your size.” “As a growth manager, we’ve had the flexibility to move away from legacy platforms and look for a more holistic solution, one that can manage both public and private credit effectively,” he said. “That kind of move is harder for larger institutions that are deeply embedded in older systems.”

Best-of-breed

It must be one of the most overused clichés in the insurance operations handbook: “What does best-of-breed look like to you?”. It’s a question that never seems to get an answer and is so subjective it can’t possibly be measured against anything but personal preference and gut instinct.

So why do we ask it? Because it’s so important. IT systems are the lifeblood of a modern insurance company that relies so heavily on data and its management.

“There’s been strong progress in technology across many areas of asset management,” said Adam Beeler, Managing Director, Credit, Angel Oak Capital. “But solving these kinds of operational and integration challenges still requires significant time, effort, and investment. Insurance companies are evolving, not reinventing themselves necessarily, but adapting,” he said.

“If the asset management industry wants to continue being successful it must be ready and well-prepared.”

We asked the panellists, when it comes to a best of breed approach, does it improve operational efficiency, and is the individual system’s return-on-investment superior to all-in-one?

“[Insurers are] using more alternative products and working more closely with the balance sheet, another layer to manage,” said Beeler, showing the difficulties. “If the asset management industry wants to continue being successful, whether by securing more assets from a parent organisation or by growing through external relationships, it must be ready and well-prepared.”

Technology plays a key role in that, he said. Constant reviews and evaluations are key for third-party stakeholders and service providers to make sure the products they offer are up to scratch.

Others highlighted certain factors, such as specialisation. “When it comes to systems and infrastructure, even within the real estate space, you need highly specialised tools,” said Beth Zayicek, Chief Operating Officer, Citymark Capital.

Zayicek said that is the reason why “we believe in a best-of-breed approach”: using systems that are tailored to the specific needs of each strategy.

“One aspect of real estate is the level of detail investors expect,” she said. “They want to know exactly what’s happening with the underlying assets, which means tracking over 100 different data points for each physical asset, and that requirement doesn’t go away when it comes to credit.”

So, for best of breed, it’s essential – a culture that needs to adapt to changing times and highly granular requirements, means it’s a given. As far as the panel was concerned, it always gave a return on investment.

The third question covered how private and alternative investment managers factor in operational and technology considerations to their plans for investment strategies, e.g., team requirements, system set-up and the ability to scale.

A big, broad question that actually required the panellists to look at root cause analysis and go back and consider their plans and processes. When it comes to operations, you have to look holistically.

“This increased awareness extends to the importance of the target operating model, which begins with defining what the firm’s goals are, whether focused on revenue, margin, or other metrics,” said Mike Kurlander, Chief Financial Officer, Adams Street Partners. “If margin is the priority, a true direct investment model must be part of the planning conversation.”

Looking at the aspects around scale and working holistically was said to be a major hurdle for many companies, with many potential pitfalls if not done thoroughly enough and with enough time and resources to change it if necessary.

Other challenges were also discussed.

“There is a reputational aspect when working with major industry players,” said Peter Russell, Managing Director, Credit Investment Operations, PSP Investments. “For instance, if a firm mishandles funding processes with a key partner, it risks exclusion from future deals.”

This, Russell said, makes it critical to have infrastructure capable of supporting timely and accurate capital calls and other operational demands, even when those demands come with tight deadlines.

“There is now a clear priority on maintaining strong relationships with leading investors by ensuring operational readiness and reliability,” he said.

The conversation was wide-ranging and complex on this topic, with multiple examples given and almost all the panellists chiming in with various points to add, proving how much these aspects played on the minds of those working with insurers.

One said that maintaining operational discipline, investing in appropriate infrastructure, and fostering strong alignment between front and back offices is essential to managing growth, supporting new strategies, and preserving reputation. “I consider downstream implications, such as how to hire for these evolving needs,” said Pete Di Lorenzo, Chief Operating Officer, SKK, on his strategies for working on this angle.

“While having a formal product committee would be ideal, reality requires adapting in real time to emerging demands."

For example, he said, in drafting job descriptions, “I have to account for the reality that with five managing partners, we can expect unexpected requests at least once a year.”

“While having a formal product committee would be ideal, reality requires adapting in real time to emerging demands,” he said.

A key theme quickly emerges from Di Lorenzo’s points: a plan is great, but the day-to-day issues and work that occur won’t respect any plan, so make sure it’s robust, flexible, and that you have a backup.

You can read the rest of this excerpt and the report in full here.

 

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