While industry pressures, such as launching new strategies, improving transparency and complying with evolving regulations have the potential to bring alternatives to the next level as an asset class, managers must rise to the occasion if they want to reap the rewards. Doing so requires a unique approach for each exerted force.
As alternative asset managers continue to navigate their rapidly changing industry, they can look to these fronts in honing the best strategy for their own firm:
Technology
As investors push for greater and more frequent insight into the performance of their investments, holistic data management is a crucial dimension that managers have the opportunity to master. They should focus on extending the lens beyond just portfolios and deals to also report on treasury, financing, portfolio management, and balance sheet and cash optimization activities - making an effort to include exposures across countries, sectors, and even financing counterparties. Capturing and utilizing this kind of data equips them to make more educated investment and operational decisions, ultimately increasing fund performance.
Organization, management and communication of this data also helps to keep LPs in the know as they seek a more complete picture of how the GP manages their capital, and how that fits in with their larger portfolio and investment strategy. Blockchain and distributed ledger technology (DLT) presents rich opportunity for managers to achieve the levels of transparency and data insight that LPs increasingly seek. Maintaining a single interface that is updated in real time can create an eased investor experience for a highly manual asset class. Northern Trust has already entered the blockchain waters by developing a private equity-targeted blockchain solution to guide certain fund administration elements, such as the capital call process.8
To achieve this standard of data management and the investor experience, managers may choose to seek a technology partner with cloud-based capabilities, making way for a smooth onboarding compared to the experience of building a custom tool. Technology should be flexible and comprehensive, covering not only the investments, but the entire process of managing a fund, such as cash and securities movement from several source banks and communications with the investors. An effective and accessible API library will form an important part of this framework, allowing managers to easily move data from one source to another with little or no bespoke programming.
Effective governance
Compliance with legal and regulatory obligations continues to be an essential requirement which needs to be carefully discharged by suitably qualified individuals. Stakeholder management and oversight is an ongoing challenge to ensure all parties are aligned, and that decision makers are equipped with accurate and timely data to manage both risk and performance.
Tying back to the theme of technology, emerging regtech tools will make their mark on managers' governance efforts. AI tools on the market can do the tedious work - which previously fell to human teams - of sifting through unstructured data such as regulatory text, flagging instances to human teams when a compliance action may be needed. AI also has the potential to monitor the cash movements of a fund and flag suspicious requests or activity that could be fraudulent.
Demand for environmental, social and corporate governance (ESG) information and metrics covering sustainable investing is set to grow with Europe taking a lead. Regulators are rolling out new disclosure requirements with detail about how to classify and measure different sustainability criteria such as climate change, pollution and biodiversity. This will impact the alternative asset investment community and drive a need for governance models to embrace not just financial performance and risk, but broader considerations of impact on social and environmental ecosystems.
The right partners should be able to assist with effective governance in multiple domiciles, as well as complementary products and services, including the European requirement for Depositary services or governance support services, to manage the shifting regulatory landscape for an expanding firm.
Expert guidance
The pressures managers face warrant big operational and strategy decisions, and left to navigate them on their own, managers risk losing sight of their original strategy and alpha-generating opportunities promised to their core investors by focusing on non-alpha generating activities.
A third-party asset service firm with a bird's eye view of all factors making up the private capital space - market trends, regulations, emerging tech and more - can be a crucial strategic partner. As a valuable team member, administrators can help provide key insights and guidance as managers make their decisions, including whether to offer a new class of products, how to inform and educate investors on their alternative investing options, and how to go about investing in technology to support their systems. The technology front in particular is expensive and time consuming and have benefits of scale when done by an administrator rather than individual firms.
Ideally, the right partner can offer bundled services, allowing the manager to liaise with only one or a few teams that have the full picture of their operations, providing the benefit of increased communication efficiencies and more holistic guidance. When a partner knows all facets of a manager's business, they're better able to anticipate client needs.
