Prakash Somaiya

How Innovative Technologies are Reshaping Alternative Investments?

Despite the technology sector being a key area of interest for Alternative Investment funds, it has traditionally been quite a low-tech industry. One can cite several reasons for this. The key reason is that the Alternative Investment firms house smaller teams and lack dedicated technology teams to support them. Alternative Investment has, therefore, historically utilized low-tech products such as spreadsheets to manage data.

Currently, the Alternative Investment industry is transforming. The industry has recently become conscious of the value offered by integrating technologies across the value chain. Technological advancements have played a critical part in meeting the diverse needs of this fast-growing industry. Despite this, many fund managers still struggle with a fundamental reporting gap. Accessing essential assets and portfolio data in a reasonable time can present a significant challenge.

Technology is transforming every aspect of the asset management industry. Fund managers and investors are particularly excited about the ability to quickly screen and scan through a high volume of investment opportunities with more detailing, allowing them to focus precisely on their investments.

However, the Alternative Investment firms are laggards in embracing technology. But at this point, if they do not adopt it, they will be at a competitive disadvantage. The speed of collecting and analyzing data has led to a considerable transformation. The current world wants instant access to data with a holistic view at its fingertips and intends to use real-time data to make its decisions.

In the Alternative Investment space, the adoption of technology has been typically driven by three factors

  1. Growth- Due to the exponential growth, fund managers are dealing with more clients, service providers, and data, all of which are difficult to manage in a low-tech environment. As more data is gathered and processed, numerous reports need to be delivered, and consequently, the pressure to adapt to modern technologies rises.
  2. Client demand- This factor considers both the regulated investors and private participants. Regulated investors such as pension funds, insurance companies, and other institutional investors are under more robust regulatory regimes, requiring a wide range of reports and analyses to fulfil their regulatory obligations. Private participants on the other hand, demand real-time information anytime from anywhere.
  3. Technological advancement and the spread of digitization- These two aspects have outdated many processes within the industry in a short time. The exchange of PDF reports over email now looks archaic with entirely digitized operations and a seamless data flow. There is a strong need for a digital universe that spans real-time reporting channels and digital workflows. Additionally, web and mobile technologies are rapidly digitizing the exchange of data and documents.

Why does the AIF industry need to adapt technology?

As the investor generation transitions from boomers to millennials, investor reporting will have to evolve.

We are talking about a generation that expects to get nearly any piece of information or purchase any goods with a few taps on their devices. They would not wait for a quarterly email or PDF on how their investments are doing. Instead, they will expect flexible and versatile, technologically enhanced investor reporting. Or else they will not take you seriously.

Without data, several processes become more challenging.

  • Monitoring fund performance.
  • Identifying, and managing risk, looking backward and forward in time.
  • Drive the strategic decision-making and leveraging internal and external data in a way that adds meaningful value to their teams and investors.

The lack of real-time data is due to disparate point software applications. For instance, different processes like CRM are used for fundraising and deal sourcing, spreadsheets for data collection, due diligence, benchmarking and market data analytics, accounting applications for fund accounting, and project management tools for tracking investments.

Monitoring financial and operational performance or executing critical fund management functions requires constant aggregation and normalization of this information. Lack of timely and accurate data may impact Risk Management, Investor relationships and transparency, reporting, benchmarking, modelling, and forecasting.

To solve these challenges and improve investor value, many leading fund managers have turned their focus from point solutions used across the portfolio and enterprise to modernize how they aggregate, normalize, and roll up relevant financial and operational performance data from those point solutions.

What are the pressing priorities?

There is a need for an Asset & Portfolio Monitoring application to give users a consistent view of the financial and operational performance. Next would be a customizable, Integrated Modelling & Forecasting application enabling users to configure custom dashboards and reports, and an Investor Management & Reporting application for the users to manage those relationships while elevating transparency throughout the process.

The next step in tech adoption is data-driven insights. Creating harmonized and streamlined data on digital platforms allows you to perform analysis exceeding aggregations of historical data. Fund managers can thus investigate the future with forecasting models and risk analysis delivered on a platform.

Let us take the example of private credit. Investors want to access details of lending assets most directly, which is often easier said than done. While making an investment decision, investors consider all aspects, including but not limited to underwriting practices, the pricing of risk, and deal structuring. Origination, documentation, and servicing capacity are the critical points of differentiation for investors when assessing managers.

Fundraising is not easy; it is one of the most exhausting, daunting, and frustrating processes GP encounters. For most managers, fundraising remains a problematic and unwelcome task with plenty of risks. With the change in investor-LP’s behaviors, if GPs do not have the right tools to engage and communicate, it can be detrimental to the raise. A GP may have a dedicated Investor Relations team to manage LP relationships and secure new commitments. Despite this, GPs find it time-consuming to organize follow-up meetings with LPs while still tending to the essential but mundane tasks of managing the firm and the portfolio. Technology can be an invaluable strategic partner to help the GP achieve their desired goals and execute the fundraising efficiently.

The ‘black box’ and ‘pen-and-paper’ days of marketing and raising capital are long over. This is the age of mass digitisation and the seamless exchange of data and documents through the web or mobile apps. It means that even smaller and emerging managers must leverage the latest technologies to streamline their capital-raising process and provide convenient access to dashboards and fund performance for LPs on the go.

A modern approach to marketing and transparency is a ‘one-two punch’ for incremental asset growth. GPs are fighting for LPs’ attention, and it has never been harder to sustain interest and keep LPs engaged. What you offer beyond performance must be aligned with the shifting demands of investors. Like it or not, technology in marketing and reporting will play a more prominent role in incremental asset growth in the future.

Fund managers are looking for solutions that can combine the knowledge of the requirements of fund managers and private funds with an understanding of how advanced technological offerings can provide value. The use of industry-standard software in the SaaS model ensures that Fund Managers do not have to invest money today and wait for two, three, or five years before harvesting the outcome of these systems.

Use of AI in Alternative Investments

We will see the progression in machine learning (ML) and artificial intelligence (AI) in the coming years; fund managers will increasingly see the benefits that AI & ML-powered systems can provide solutions for processing both structured and unstructured data. AI brings in a critical advantage over human analysis. It can process massive data quickly and adapt to news and volatile market conditions more frequently than humans. Many AI systems dig through various social media venues to gauge consumer, market, and investor sentiment on a particular asset or security. The GP may then use this data to create a proprietary indicator on which they will base their investment decisions. By analyzing big datasets quickly and efficiently, AI is helping to speed up vital business processes from due diligence to benchmarking.

Due diligence and risk assessment is expensive and time-consuming, and AI can change that.

Let us take contracts of portfolio companies with their customs as an example – AI can read the agreements and pick out the key risks and contractual obligations for the fund managers to understand them better and assess the risk of signed contracts. AI can provide further benefits relating to more rigorous due diligence and value creation by understanding the portfolio areas requiring improvement.

Deal sourcing is another area where AI can significantly impact quantitatively, increasing the ability to screen the deal flow. AI can also help qualitatively rationalize the deal flow to only include opportunities that meet several predefined criteria, resulting in more effective targeting.

Fortunately, Alternative Investment firms are data-rich, so the possibility and success probability of AI-led disruption are relatively high. Processes that require labor and are time-intensive will become quick and automated, meaning investment professionals will have more time to perform high-value tasks. While one can do some aspects of these processes in programs like Excel, AI provides accuracy and the ability to learn and improve its processing. These are the values that you can’t teach a spreadsheet.

The Way Ahead

While technological breakthroughs influence the investment landscape, regulatory boards are introducing more compliance directives for the fund managers.

Tech solutions that comply with local and international regulations can capitalise on the internationalisation and an increasing number of regulatory frameworks in alternatives.

Technology is, without a grain of doubt, one of the significant disruptors of today’s fast-paced VUCA world. In the alternative funds industry, people have started realising it over the past few years. The most successful alternative fund managers will be those that can use strategic thinking and approaches to capitalise on all the new tools at their disposal: Technological platforms, reporting templates, or data to support deal-flow sourcing.

The investment processes rely on trust and accountability, which comes from contact with people, not machines. Human understanding, instinct, intuition, and experience will always be in vogue when closing a deal.

Most technologies out there ‘do the job’. Only a few have features that work better than others. Ideally, these tools should support the full spectrum of GP activities, from fundraising to fund reporting with integration. They should provide apparent oversight of the processes, ensure proper due diligence on investments and efficient documentation of the exits.

Ultimately, managers can best embrace technology solutions by committing fully to implementation and leaning on robust user support offerings.

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