As the performance of public equities and bonds have become increasingly corelated in recent years, many forward-thinking investors are increasing allocations to asset classes in private markets. Their rationale: Seek higher returns from private asset classes that are insulated from highly efficient public markets. Private debt and equity managers now enjoy an enviable inflow of capital to invest from a larger client base, along with a need to rationalize their data acquisition and investment processes.
Investors’ growing enthusiasm for private investments offers asset managers an opportunity to gather large pools of capital from many investors for placement at private companies. Managers’ success in such markets hinges on their ability to gather and master vast amounts of data on private issuers, to select and manage suitable assets for their clients, and to integrate these assets into the broader portfolio management processes of risk management, reporting, regulatory compliance, and other activities. To prevail in such markets, asset managers are well advised to adopt investment platforms that integrate the management of public and private investments into a unified, well-documented system that allows high-quality stewardship of capital for a growing clientele of sophisticated investors.
Data standardization, complexity, and scale
In anticipation of offering private equity and debt to investors, managers gather the raw data on each asset from its issuer and bring order and discipline to its use. “It’s really challenging in operations for private markets because managers have to create their data in the first place,” says Daniel Gilmartin, senior director of private market products at Aladdin®. Gilmartin oversees alternatives products across Aladdin and eFront®, which are BlackRock’s premier investment technology platforms. “When managers begin an investment process with portfolio companies, they have to do their due diligence, collect all the data themselves, and then pull it through the entire investment life cycle to create an investor’s portfolio.” This data assembly process requires managers to gather and standardize investment data in an effort to develop a clear-eyed view of assets, their risk/return profile, and how they can be deployed in an investor’s portfolio. “While it sounds like public markets, it’s quite different because of the nature of the data, and as a result, managers have to set up their own governance and management process,” says Gilmartin.
Meanwhile, managers need to integrate this data into their investment processes with a view toward making investment decisions based on unique characteristics of private assets. Private assets are typically offered with a “clear investment thesis,” says Melissa Ferraz, managing director and global head of Aladdin Alternatives at BlackRock. “This is the ‘special sauce’ that a fund manager brings to the investment such as specific KPIs that may be relevant only to a particular company based on its stage of development or its geographical or industry position.”
A path to progress for asset managers: SaaS and data governance
Investment platform providers offer services to expedite managers’ development of private market data. “A portion of our technology offering is a managed data service,” says Gilmartin. “It’s technology, people, and processes to help collect the data on behalf of the clients, and we offer ways for our clients to upload and amend their data depending on their needs and asset classes, too.” This process of gathering data is more than an administrative data collection exercise. Using advanced technology—notably, natural language processing and next-generation automation—and a services team from eFront, managers are able to collect and provide structure to vast amounts of data on private market assets. “This combination of technology and services is unique in the industry,” says Gilmartin, “and it allows our clients to collect, structure, and load diverse data sets briskly and accurately. Done well, these early steps put clients on a path toward a truly functional investment platform for both public and private asset classes.”
Bringing order and discipline to the data underlying private assets is a first step toward integrating them into a broader investment process. Effective portfolio management also requires workflows that provide an integrated, holistic view of data across a portfolio’s entire holdings, both public and private assets, and ultimately its support for investors’ objectives. Notably, this is seldom a one-size-fits-all solution, and asset managers routinely tailor their integration plans to their own unique requirements. “It makes sense to bring the publics alongside private asset class information in a lot of cases,” say Gilmartin, “and our eFront and Aladdin technology offerings are all about bringing the best of both together.”
Tailoring an investment platform for a particular manager hinges on a clear view of its investment requirements and those of its clientele. In an effort, to expose a full view of what is possible, Aladdin offers professional service teams that work alongside clients, offering expertise on their current and expected operating models. These integration teams also draw on their experience with other firms that have faced similar challenges. “We have a dedicated team working with clients to understand the ROI on our transformation projects,” says Ferraz, “who go into clients to understand their current operating model, partner on a target operating model and become more efficient with the use of our solutions.”
An integrated technology platform for managing an entire portfolio, including public and private asset data, supports managers’ oversight of an entire portfolio. “Once managers have the data collected on a single platform, a manager can have a full portfolio view, and then they have to do performance reporting and risk analysis,” says Gilmartin. “We can help institutional asset managers collect the data in the first place so that they can add standardization where possible, but we seek to be flexible so that our institutional clients can do the pieces that they need to do themselves. They can bring that data in centrally and manage their portfolios along with ongoing investment operations such as forecasting or, say, analyzing regional risks associated with their public or private book.”
Gilmartin highlights that institutional investors have growing expectations from private market investments, and accordingly, managers should be equipped to handle these new asset classes with sophistication. “Private and institutional asset managers face growing demands from their clients,” says Gilmartin. “They want to monitor risk more effectively. In private markets generally you see investors holding assets for longer, which means you have to have a different risk view. Our technology platform is especially strong in that it provides a clear understanding of what’s going on in your portfolio, whether it’s public or private, and also since you’re holding those assets longer, what you can or should about portfolio risk.”
“Retailization” ushers in more complexity
The largest institutional investors have used private debt and equity investments for years. Now, as investors grow weary of public markets, a new cohort of institutions, family offices, and high-net-worth investors are increasingly eager to invest in private assets. Meanwhile, asset managers are hungry to raise money to meet issuers’ demand for capital.
“We see in the market a need for fund managers to find new sources of capital,” says Ferraz, “and while the funds are becoming bigger and bigger, the allocations from institutional investors can’t keep pace, so there’s a need to tap into the retail market to find new sources of capital.” She anticipates that the market will see a requirement for “much more timely reporting and an ability to deliver that data to either wealth advisors or third-party platforms briskly.”
Reporting on performance and net asset value (NAV) may well shift from quarterly to monthly as more investors hold positions in private markets. Says Ferraz, “To cater to the high-net-worth investor’s interest in private investments, there are likely going to be operational governance and technology challenges. HNW investors using intermediators and wealth platforms may expect data from client reporting that is different from what is typically provided to large institutional investors. “They’re likely to want to see a timely representation of their holdings and its value.”
In our view, to prosper in this growing market, private fund managers could be well served by using a disciplined approach to acquiring and managing data on private assets and to integrate these assets into their reporting capabilities. By doing so, they may be well positioned to serve their growing clientele’s higher expectations for investment analysis, risk management, and reporting.
The opinions expressed are subject to change at any time without notice.
BlackRock’s Aladdin® and eFront® platforms are financial technology platforms designed for institutional use only and not intended for end investor use.