Moore’s Robert Palazzini discusses how the technology landscape has changed for alternative asset management and the importance of a world class software system.
It’s no secret that the hedge fund world has always been quick to adopt new technology. By continually implementing new methods of absorbing and analysing market data they have pushed the accepted technical boundaries. From “black boxes” which run complex automated strategies to dubious high frequency trading bots which exploit minute arbitrages à la Flash Boys.
Conversely, alternative assets have traditionally not taken well to new technologies. Until quite recently, even reasonably large and well established real estate and private equity funds have been run almost entirely on excel based files.
However, the landscape has changed. The additional regulatory requirements and administrative burden facing investment managers has increased dramatically over the last 10 years in part as a result of the global financial crisis and although there are a handful of software solutions available they are few and far between and can be expensive and require specialist skills to maintain.
Gone are the days where only a registered office on a Caribbean island was enough to avoid the watchmen. Administrators are now responsible for all aspects of the fund life-cycle. From basic accounting and company secretarial duties to full compliance services, tax reporting, cash management and portfolio analysis. Fund managers are more willing than ever to relieve themselves of these more onerous elements and delegate responsibility to third party service providers.
The backbone behind any administrator offering “a complete solution” is a world class software system. It needs to be flexible enough to adapt to all types of exotic asset classes and robust enough to be able to cope, at scale, with a multitude of different fund structures.
Being in control of the data flow from inception to liquidation, and funnelling that data through one primary database means the reporting capabilities are more powerful than ever before, particularly when dealing with co-investment vehicles or complex fund of fund structures. Want to see one investor’s diluted position through four layers of Special Purpose Vehicle (SPV)? No problem.
For that reason, the most successful service providers all have their own dedicated systems people who remove the dependence on external support desks and software vendors. Having an internal team of experts is crucial to managing data and transforming it into meaningful information. This new hybrid class of financial professional, part accountant/part programmer has evolved to bridge the gap between the technophiles and the technophobes.
Some use US Generally Accepted Accounting Principles (GAAP) accounting standards whilst others prefer International Financial Reporting Standards (IFRS). Some want to see monthly Net Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) multiples, Total Value to Paid In (TVPI), Distributed to Paid in (DPI) and Multiple of Money (MoM) for each investment whilst some are happy with a simple Internal Rate of Return (IRR). Others like to measure performance against an external benchmark like the MCSI world index or the S&P500. If your administrator isn’t offering you this level of detailed reporting then you need to ask why not, or start shopping around for a new one.
Of course the added advantage of better systems is improved efficiency. Automating everyday processes minimises the risk of human error and improves the speed of processing. Not only that, if you can place trust in the processes which create the data, you can trust the data integrity itself. This in turn establishes confidence in the quality and accuracy of information being produced. In this new Matrix style world where we control the robots, there’s no excuse for slow, inaccurate information.
It takes a leap of faith to jump in to the future, especially when deciding to outsource activities, but if you are still struggling to let go you should perhaps consider your relationship with your current service providers. Are they embracing new technology and taking full advantage of the digital age, or are they technological dinosaurs, stuck in the past and doomed for extinction?