When it comes to technology in financial services, nobody wants to face the ignominy of suffering a Kodak moment, namely getting left behind when all of those around you are aggressively digitalising and future-proofing their businesses. At the same time, very few chief financial officers and chief operating officers will expressly endorse an expensive technology project which does not deliver immediate value. Innovation is therefore something of a balancing act.
Representatives across the alternative investment space gathered for a special panel session in New York, hosted by FIS, to look at how operating models for alternative fund managers are changing, how their fund administrators are responding, and where new technologies can help alleviate the pressure points for both sides.
Traditional fund houses are increasingly moving into alternative products, and the challenge many are facing is how to update their operating models. The technology that has underpinned their traditional investments cannot, for example, meet the complexity associated with private equity. In addition, the traditional outsourcing model is also under pressure to adapt.
“The alternatives side is hyper complex; in certain cases, they are almost seven to 10 years behind the traditional side in terms of sophistication of the investor for things like dynamic reporting and operational due diligence,” said Dan Houlihan, head of asset servicing, Americas, and regional head of global fund services, Northern Trust.
Correctly valuing the assets held in a real estate, private equity or infrastructure portfolio is a more time-consuming and complex process than striking a NAV (net asset value) for a money market mutual fund. Furthermore, the client and regulatory reporting obligations for illiquid portfolios also diverge significantly from those of more retail-focused investment vehicles.
The need to meet regulatory obligations and gain accurate NAV data is forcing a new search for efficiencies.
“Operational efficiencies are a big driver: how can we do things faster, how can we close the books in one day versus two weeks, how can we get information to our partners so that they can use that information to look at deals in different ways,” explained Jason Donner, chief financial officer, Veritas Capital, a private equity fund manager with $8.8 billion in assets under management.
One way fund managers are looking to gain efficiencies is through technology. More and more are turning to technology vendors and demanding new data products from their administrators to demonstrate transparency to both their investors and regulators.
“Technology is increasingly becoming a bigger part of the growth strategy and to take on some of the more mundane tasks so they can focus on value,” said Tony Chung, head of alternative product management and strategy, FIS. “As a solution provider, clients want to learn more about what we’re doing around the digital channel, analytics, and cognitive services.”
One strategic focus for alternative managers is how can they automate as much of their operating processes as they can, especially when it comes to regulatory reporting, know-your-customer (KYC) and anti-money laundering (AML), as well as reconciliation and statement production.
One solution, the panel highlighted, would be some sort of portal where fund managers and their clients can plug in and automate data production, as well as help with client relationships.
The automation of this data can also benefit the front-office for private equity managers. Veritas Capital’s Donner added a tool that can consolidate data across the entire business and can then be applied to help front-office decision-making will be of great value to the alternative investment community.
“We want to take all of the information we are collecting in the organisation, plus external information, and find some value from it, specifically to our front-office so they can use that data to predict cognitive performance, look for trends or use it in the investment process,” Donner highlighted.
However, while new applications and new technology may well be good in principle, the problem is how to tie all of these systems and platforms together. With each piece of technology being so specialised, there is a risk that they may not integrate with each other and the fund manager may not be able to extract the necessary data.
“We are buying more solutions, but we are pushing on all of them to help us with the integration piece so that we are not working with all of these different technologies that we then have to run reports out of and load onto another system,” said Margaret Mangelsen, director of accounting and operations at Argentem Creek, a $2 billion emerging markets-focused hedge fund manager.
Technology vendors, such as FIS, are now being tasked with providing some form of standardisation that enables a seamless integration between legacy and new technology platforms.
“The holy grail is to integrate all of these technologies, and bring a standardised concept. Our approach to solve that problem is to standardise how these systems talk to each other,” explained Chung.
“If you look at the concept of an app store on your phone, there is a whole industry called integration platform-as-a-service that is trying to do the same thing. We want to work on something that integrates like a public application to help our customers bring everything together. Our end goal is to get to a place where we can deliver technology on a continuous delivery model and standardise a lot of the integration process.”
It is increasingly becoming a reality for alternative fund managers to adopt a new technology strategy. As the industry evolves to meet new investor and regulatory demands, doing nothing with your technology is not an option. At the same time, fund administrators will have to adapt their service offering and providing new tools to meet these demands.
Whether new technologies such as robotic process automation (RPA) and blockchain will become part of servicing alternative fund managers remain to be seen. But the demand for efficiencies and value-added services could mean these technologies will become part of the mainstream sooner rather than later.