Barnaby Piggott discusses how to leverage digital solutions to tackle the rise in fragmentation in private market operations.
Holland Mountain’s CEO, Barnaby Piggott, presented at Private Markets Investor Europe 2022 to share his insights into the challenges of fragmentation in private market operations. In his presentation, he explored the topic in more detail, and also asks, how do we move from fragmented to integrated?
The rise in fragmentation in private market operations
In the last five years, there has been a rush of traditional asset managers competing to gain exposure to private market assets. Some firms hired teams and developed new business units organically, while others acquired Private Capital managers, to quickly get a foot in the door.
Regardless of approach, asset managers in this position will find that the complexity of what is being managed and reported-on has increased significantly. To compound these issues, the asset manager’s operating model will be based upon liquid securities, and typically won’t be easily adjusted to handle the different asset classes. This makes streamlining operations, consolidating data or aggregated reporting very challenging.
The number of private market specific software vendors in this space has also increased. The trend for all managers of private assets has shifted from end-to-end solutions to more of a ‘best of breed’ approach, particularly for portfolio management and monitoring. This shift means that data is now typically held across multiple systems with some considerable overlap. Traditional asset managers face the two-step challenge of firstly aggregating data across their multi-private-asset portfolio, then repeating the process by aggregating this dataset with their liquid portfolio dataset. Without a robust systems and data strategy to address this challenge, firms will struggle to keep up with the pace of digital transformation and will eventually fall behind their competitors.
Asset managers who primarily deal with liquid assets, tend to face significant challenges when it comes to private markets. The data and reporting needs for private markets are vastly different to those of public markets. Each private asset class, from private equity and private debt through to real assets and infrastructure investments, has a unique set of requirements making the process of data aggregation more complex, especially as the various supporting systems may also be different. Where processes such as fund administration are outsourced, managers also face the issue of keeping duplicate records, sometimes referred to as shadow bookkeeping. It isn’t unusual to find a different outsource provider associated with each asset class, resulting in a very complex set of data flows.
IT and change functions within traditional asset managers tend to lack both the business knowledge and industry-specific systems experience to successfully integrate private and public asset classes. There are a lot of assumptions made about public and private markets technology, with some firms believing that the two eco-systems are in effect very similar. The two are very different. In terms of tooling, the two sectors are moving in different directions. Public market technology is in general, consolidating and moving towards a system to cover all needs. Whereas Private Capital technology is taking a best-of-breed approach, with firms tending to have a specialist system to cover each functional area.
There is currently some reluctance to fully embrace use of API technology and capabilities among many Private Capital software vendors, which makes it very difficult to integrate data between back and middle-office functions, and provide comprehensive reporting to investors. To compound this issue, most asset managers are trying to leverage data solutions built around public assets to deliver combined public and private asset reporting. Going forward, as asset managers look to re-engineer their technology stacks, they will need to incorporate private asset complexities from the outset.
High levels of fragmentation across internal operational systems and data will also impact the investor experience. Where fund managers are reliant on manual business processes, and Excel, email and PDFs to move information, there is significant potential for data challenges that will affect the quality of service to investors. Firms are investing in onboarding solutions and investor portals/data rooms, but this doesn’t solve the underlying data fragmentation problem.
Working towards unfragmented markets
It’s true that there are different technologies required across alternative asset classes, however we would suggest that there is a way to approach this to improve integration. The processes and KPIs for monitoring Private Equity investments are very different for Private Debt, Real Assets or Funds of Funds. However, when thinking about the processes and functions for front office (CRM) and back office (accounting / portfolio management), public and private assets don’t need to be completely different to public assets. The main reason these functions are fragmented today is lack of an operational strategy to consolidate them. There are real opportunities here to improve, streamline and consolidate; all leading to better efficiency and ultimately higher fee margin.
A robust data strategy is paramount to enable asset managers to consolidate and integrate their public and private markets. With the current rate of M&A activity between large asset managers and underlying private asset managers, firms that are willing to take a step back, design a robust operating model and put in place a playbook for the ongoing integration of new private asset strategies will reap the rewards.
Barnaby has over 20 years of experience working with Private Capital fund managers and investors. He founded Holland Mountain in 2009, building on a solid reputation for driving growth and maximising efficiency in the private equity, private debt, real estate and infrastructure sectors. Since launching the ATLAS data platform in 2019, Barnaby has been on a mission to help Private Capital managers on their journey to ‘Data as an Asset’.