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Prakash Somaiya

How technology can create a difference in the Alternative Investment industry

Despite the technology sector being a crucial area of Alternative and PE Investment, it has traditionally been quite a low-tech industry. There are many reasons for this. The key being Alternative Investment firms are home to smaller teams, which lack technology teams to support them. Alternative Investment has, therefore, historically utilised low-tech products such as spreadsheets to manage data.

Currently, the Alternative Investment industry is undergoing a transformation. The industry has woken up and realised there is a lot of value to offer by integrating technologies across the value chain. Advancements in technology have played a crucial part in meeting the diverse needs of every growing industry. Despite this, many fund managers still struggle with a fundamental reporting gap. Accessing even the most essential assets and portfolio data in a timely fashion 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 projects with more detailing, allowing them to focus precisely on their investments.

Alternative Investment firms are laggards when it comes to embracing technology. But at this point, if they do not adopt it, they will be at a competitive disadvantage. The speed of collecting and analysing data has led to a considerable transformation. Today’s world wants to have instant access to data with a holistic view at their fingertips and intends to use real-time data to make their decisions.

The adoption of technology in the Alternative Investment space has been typically driven by three factors

  1. First – growth . As a result, fund managers are dealing with more clients, service providers, and data, all of which is difficult to manage in a low-tech environment. As more data is gathered and processed, along with a higher number of reports that need to be delivered, the pressure to adapt to modern technologies rises.
  2. Secondly – client demand, both from 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, want to have real-time information anytime from anywhere.
  3. Finally – the advancement of technology, the spread of digitisation, has quickly outdated many processes within the industry. The exchanging of PDF reports over email now looks archaic compared to other industries with entirely digitised operations and seamless flow of data. There is a strong need from the digital universe around real-time reporting channels, digital workflows, and digitising the exchanging of data and documents based on web and mobile technologies.

How is the need to adapt to technology justified?

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 are not going to wait for a quarterly email or PDF on how their investments are doing – they will expect a flexible and versatile, technologically enhanced investor reporting, or you will not be having a meeting.

Without this data, several processes become more challenging …

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

The reason for the lack of real-time data is use of disparate point software applications being used for different processes like CRM being used for fundraising and deal sourcing; spreadsheet being used for data collection and due diligence, accounting applications being used for fund accounting, project management tools are being used for tracking investments, Spreadsheets being used for benchmarking and market data analytics.

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

As a part of a broader effort 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 modernise the way they aggregate, normalise, and roll up relevant financial and operational performance data from those point solutions.

What are the need-of-hour solutions?

The need is to have an Asset & Portfolio Monitoring application that gives users a consistent view of financial and operational performance; a customisable Integrated Modelling & Forecasting application enabling users to configure custom dashboards and reports; and an Investor Management & Reporting application, so users can manage those relationships while elevating transparency throughout the process.
The next step in tech adoption is data-driven insights. Creating harmonised and streamlined data on digital platforms allows you to perform analysis that goes well beyond aggregations of historical data. Fund managers will be able to investigate the future with forecasting models and risk analysis delivered on a platform.

Let us take an example of private credit. Investors want to access details of lending assets most directly. This 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 now 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, unwelcomed task with plenty of risks. With the change in investor -LP’s behaviours, if GPs do not have the rights tools to engage and communicate, it can be detrimental to the raise. A GP may have a dedicated Investor Relations team tasked with managing LP relationships and securing new commitments. Despite this, GPs find it time-consuming to organise follow-up meetings with LPs while still tending to the essential day-to-day tasks of managing the firm and the portfolio. Technology can be an invaluable strategic partner to help the GP achieve their desired goals and complete the fundraise 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. This 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. GP’s are fighting for LPs’ attention, and it has never been harder to sustain interest and keep LP’s 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. Use of industry-standard as the 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 by a human. Many of these 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 analysing 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 an expensive and time-consuming activity – AI can change that.

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

Deal sourcing is another area where AI can significantly impact quantitatively, increasing the ability to screen the deal flow. AI can also help to qualitatively rationalise 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 labour and are time-intensive will become quick and automated, meaning investment professionals will have more time to perform high-value tasks. While some aspects of these processes can be done in programs like Excel, AI provides accuracy and the ability to learn and improve its processes continuously. These are the values that you can’t teach a spreadsheet.

Conclusion

While the advances in technology influence the investment landscape, more compliance directives are introduced by regulatory boards, and fund managers have a responsibility to adhere.

Technology 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 process of making investments is one that relies on trust and accountability, which comes from contact with people and not with machines. Human understanding, instinct, intuition, and experience will always be in vogue when it comes to closing a deal.

Most technologies out there ‘do the job’ but some have features that work better than others. Ideally, these tools should support the full spectrum of GP activities, from fundraising to fund reporting in an integrated fashion. They should provide apparent oversight on the processes that matter and ensure that proper due diligence on investments and exits are well documented.

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

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