Estimated today at $6,000 billion, the global alternative investment market could reach $17,000 billion by 2025.
For asset management players, this evolution in the structuring of their portfolio implies adapting a key dimension of their activity: data management. Faced with multiple challenges, players of all sizes have no choice but to accelerate their digitalization process.
Alternative investment data
The trend continues to grow. A growing number of investors are attracted by an alternative to the listed market, which is currently characterized by volatility, low predictability and low interest rates. Private equity, private debt, real estate, hedge funds and natural resources... Across all asset classes, the alternative investment market is exploding. This is a major development that has a direct impact on the data collected.
In concrete terms, what are we talking about here? Mainly two categories are concerned:
- Static data on the one hand, i.e. data related to management companies, funds raised and their characteristics (investment strategy, size, type of units, etc.), investors (identification, KYC process, tax domicile data) and deals as well as portfolio companies/funds.
- On the other hand, there is transactional data: essentially data related to investments, whether direct or fund of funds (subscription, call, distribution, secondary redemption, etc.), and data related to the liabilities of the funds under management (amount of commitments, calls for funds, valuation of investments, etc.), the front office (related to due diligence) or the back office (essentially accounting)
The requirements differ for each player. While General Partners (GPs) have to manage all this Front to Back information, Limited Partners (LPs) focus on portfolio and transparency data. As for asset servicers, while their needs depend on the mandate given by each management company, their attention is focused on Middle-Office and Transfer Agent data.
However, for everyone, the data quality is a key issue for everyone. The ability to report reliable information, to manage efficiently or to produce the reports required by the various regulations depends on it. In addition, it opens up the possibility of automating repetitive processes with the opportunity to save precious time to focus on analysis and identification of investment opportunities.
Other decisive dimensions, at the heart of any financial transaction: information security of course, but also the need for transparency - the search for information within the investment portfolio in order to report the real assets to investors and identify insights.
The emergence of new expectations... to which to respond
This includes financial information, but also data that is becoming increasingly important in alternative investment: extra-financial data of the ESG type. Data from unlisted companies is difficult to obtain and requires specific data collection, storage and processing, i.e. an information system and adapted processes. A specific due diligence process will be necessary, for example, to verify that a company or a building targeted for investment is indeed committed to an ESG strategy.
Another reality to consider is that while the alternative investment industry has ultimately weathered the Covid crisis very well, it has impacted the sector on several levels. One clear trend is the acceleration of the digitalization process, which has pushed GPs, LPs and fund administrators alike to acquire, at the very least, a CRM to collect and share information and work remotely on processes such as due diligence.
Another directly related project concerns the data security and the digital management of KYC policy (identity documents, confidential documents), in compliance with RGPD constraints. At the same time, the health crisis has caused alternative investments to be redirected towards new growth areas: health, technology and food.
In the same vein, investors' requirements have evolved: more digitalized, demanding institutional players, family offices, and the emergence of more and more individual investors.
These investors are now looking for optimized data, as up-to-date/quick as possible, with the possibility of orienting their strategy and defining the risk associated with each investment. The optimization of data is therefore a decisive lever - also - to improve the investor relationship.
Alternative investment: increasingly complex regulatory constraints
In fact, alternative investment is less regulated than traditional investment. However, from the Autorité des Marchés Financiers (AMF) to the Alternative Investment Fund Managers Directive (AIFM), and including traditional regulations such as AML (Anti-Money Laundering), CRS (Common Reporting Standard) or GDPR (General Data Protection Regulation), the constraints are now more and more numerous. Data collection, transformation and sharing are all practices that put strong pressure on alternative investment players and strongly encourage them to digitize and monitor data quality. The law is evolving rapidly and reporting must follow accordingly. Here again, only the implementation of an effective digital strategy can meet this challenge.
As with the ESG dimension, the challenge is tolearn how to capture, process and communicate data. Automating in order to gain efficiency - and avoid getting lost - requires the use of professionals capable of automating the production of reports. However, in this area, the maturity of alternative investment players is currently very heterogeneous. Clearly, the large structures are ahead of the game in terms of digitization, while the smaller ones are focusing on day-to-day operational management. But there is no doubt that needs will continue to grow and constraints will become more complex. To avoid falling behind, it is time for everyone to get on board the digitalization train.
By Nabil Benhaddou
President of AssetValue Consulting