Technology, Data, & Outsourcing: The Future of Alternative Asset Management

The alternative investment industry is plagued by outdated tools used to track financial performance metrics, assess portfolio risk and communicate with investors. Simultaneously, managers are finding that to effectively reduce costs and futureproof the business, they need to outsource to providers that have tools that enable the business to scale. In order to stay competitive in a world fueled by data, alternative asset managers need access to technology that enables better decision making, as well as service providers equipped with the right tools and strategies to enable growth.

As alternative assets rapidly become more mainstream in investors’ portfolios, and the industry continues to experience exponential growth, one thing is obvious: managers need to embrace data and technology in order to generate lasting returns for investors.

BNY Mellon recently surveyed 100 institutional investors and 100 alternative asset managers on their respective priorities. The resulting report, From Alternative to Mainstream: Going and Growing Digital, underscores the critical role data and technology will play in the future of the alternative investment industry.

The findings revealed two primary challenges: 1) difficulty accessing and aggregating data across fragmented technology solutions, and 2) the need for access to data across an entire organization and for external stakeholders. Alternative managers must embrace digital transformation to not only efficiently streamline operations, but also to maintain a competitive edge and facilitate greater internal collaboration.

A Dire Need for Industry Innovation

Exacerbated by the global pandemic, managers are moving almost all daily business functions online — and into the cloud. BNY Mellon’s survey report indicates 96% of respondents “believe cloud computing will drive digital and operational transformation in their organizations.” This creates a fundamental challenge when it comes to the existing framework for ongoing fund monitoring and administration.

In the new digital world, managers must be able to efficiently leverage technology and data in order to sustainably generate returns for investors. According to the BNY survey, the three top use cases for data by alternative asset managers include: performance and risk management; product design and development; and asset selection and allocation.

Up until a few years ago, most fund accounting and administration processes relied heavily on spreadsheets to perform data management and analysis. And this is still the case for many alternative asset managers today, particularly in private equity and real estate. The managers that have adopted technology have been forced to choose between had two options: piece together several fragmented software solutions to manually integrate processes and data, or select a tool that promises seamless integration, but falls short because it is not designed to meet the industry’s needs. So, the status quo for administration is increased friction between stakeholders; redundancies, duplication of effort and inefficient processes; errors resulting from manual data entry; and an extremely frustrating user experience.

Challenge #1: Fragmented Solutions

According to the BNY survey, “the most-cited obstacle to effective data management for alternative asset managers is the difficulty of aggregating data across fragmented systems.” The overwhelming majority of the solutions that exist for managers, or their service providers, to monitor their portfolios, report on fund performance, and liaise with investors were not purpose-built for the industry. Data is duplicated from one system to the next, breaking what we believe is the single-most important fundamental concept of effective data management — having a single source of truth. When you have multiple internal and external stakeholders with a need for the same data for varying use cases, it is fundamentally important to derive that data from a single source in order to be efficient (both operationally and economically). Especially in alternatives, the use cases for the data (whether it be fund accounting data, portfolio company monitoring, investor data or otherwise) vary widely and are bespoke for each stakeholder. Without an aggregated, centralized solution, managers are left with inconsistent, error-prone data, a run-around of processes in order to analyze and disseminate it effectively, and a never-ending roadmap of new and additive solutions that need to be integrated, which wastes time and money.

Challenge #2: Ease of Access Across Stakeholders

Beyond the basic need for data to be reliable and consistent, the right people need to have access to the right information. Access is also critical when it comes to measuring the data; if information is stored in various disparate systems, it introduces risk around manual (mis)entry. According to the BNY report, it is “increasingly important to ensure that data accessible across an entire enterprise as alternative asset managers work to derive the greatest value from the data they hold.”

This concept of “data democratization” is not limited to internal stakeholders though. Within the alternative investment industry, the benefits of democratizing data extend from the employees of fund managers to their investors, to their portfolio companies, their administrators, auditors, tax preparers, compliance firms and law firms to name a few. Each of these counterparties has a need to access the same fundamental data, albeit different versions or representations.

Developing technology-driven solutions to overcome these challenges is the single most important task at hand to providing unparalleled access to data that can propel the business forward.

Looking Ahead

The mandate to introduce cutting-edge technology is clear. Those who seize the opportunity to streamline business operations and integrate data for more in-depth analysis will ultimately be able to focus on delivering better returns for investors.

Vector was founded to fix these two fundamental challenges. As industry veterans, we understand the unique challenges alternative investment stakeholders face; we bring deep expertise in fund administration — and we’re set on modernizing it. We are developing cloud-based technology that will disrupt the antiquated workflows plaguing fund administration and accounting. And, we’d love to share it with you.

Subscribe here to receive future updates.

Originally published at https://vectorais.com on January 27, 2022.