eFront: How tech can unlock private markets
eFront’s Tarek Choum …
GPs are already bullish on outsourcing, both as clients and investors, largely because their business is not getting any simpler. Contracting a service provider allows them to focus on generating returns, yet the in- creasing complexity of LP demands and regulatory requirements only ups the stakes for getting this collaboration right.
eFront’s Ludovic Legrand and Iain Rob- ertson believe today’s asset servicing firms have the talent and technology to signifi- cantly improve a firm’s operations, but only if managers take the time to create the right system for working with their chosen service provider.
Ludovic Legrand: Managers are well aware of how much of a difference asset servicers can make in their own business, but a combination of ever-increasing investor demands and pressure on the resources necessary to meet those demands, we think, are the major factors. Asset servicers now have the domain expertise and technology available to help them.
Iain Robertson: I would add that there is still room for the industry to grow. Many GPs continue to periodically send their investor reporting in PDF format, thereby making it difficult and labour-intensive to access the raw data. Also, the granularity and consistency of data that LPs can get varies significantly from one GP to another.
Many LPs want to conduct proper risk and performance analysis, but this usually remains wishful thinking.
In their defence, historically, a number of elements prevented LPs from conducting in-depth analysis that really added value, such as the varying timeliness and quality of data as well as a lack of uniform data definitions to encourage like-for-like comparisons
Now LPs are looking for a system where all GP data will be centralised and easily exported into their own centralised reporting systems, enabling LPs to conduct in-depth analysis such as cashflow forecasting, performance contribution and Value at Risk.
LL: They certainly can, but at the moment there are so many qualified asset servicers that they do not need to spend the upfront time and cost to build one from scratch. Today’s fund administrators and custody banks sit at the heart of the industry’s data. Traditionally, data quality and consistency has been a significant challenge for private equity, largely due to the lack of formalised standard practices to manage non-homogeneous data in a consistent manner.
However, the alternative investment market has really evolved in recent years to meet investor expectations. One example in the private equity market is the increasing adoption of ILPA templates and guidelines, particularly on notices, such as calls and distributions, capital account statements and fees. Many fund administrators and custody banks have helped to push these market best practices to a much higher level.
IR: Furthermore, GPs are expecting that if they do outsource, the service provider will be able to aggregate data from multiple sources into the firm’s own in-house system. The best service providers will be able to manage both structured and unstructured data. Although, as the industry matures, the amount of structured data will increase as more and more reporting standards are adopted. And the more predictable, or structured, the data is, the more it will drive an AI revolution in the sector.
IR: Enhancing data quality is obviously the first necessary milestone needed to improve operational efficiency. The data acquisition process is really complex and cumbersome for both GPs investing directly into underlying companies and/or properties, and LPs, including funds of funds, who have to manage the extra layer of data pertaining to multiple funds and all the underlying investments. As a GP or LP, the quality of the data is really the quality of the decisions being made.
LL: That is why service providers are leveraging their position at the heart of the industry’s data to offer a platform like ours, positioning themselves as a partner for managing data between GPs and LPs. They are really looking to go beyond traditional services like fund accounting.
With a platform accessible by all market players (GP, LP and asset servicer) and populated by a rich data set, asset servicers can help GPs to provide timely, quality data to investors. This, in turn, enables investors to drill down into their portfolio and analyse it further.
IR: A centralised platform accessible to all market players provides an excellent way to optimise data exchanges and offer added-value solutions to all GPs, LPs, asset servicers and even regulators.
LL: Speed is no small thing. For any large investor, simply receiving the data in a timely manner will be important. Systems can help to capture, report and interpret that data for LPs, allowing for better analysis. Furthermore, the best systems today offer a robust security framework with controls to facilitate the exchange of data within the regulatory environments that funds tend to operate in. Of course, ownership of data and the responsibility to safeguard data will be increasingly important.
IR: A lot of the questionnaires for service providers we see are actually quite sophisticated, even in terms of IT issues. But we think it is important that a service provider be able to work with the systems the GP is already using, so that the flow of information is as frictionless as possible. The best asset servicers will be able to work with all of the systems and solutions that a firm uses in order to receive and share data. The biggest challenge that still remains in all of this is how to reconcile the data from various sources and departments.
LL: One of the things to be mindful of, especially for managers in multiple asset classes (eg, private equity, private debt, infrastructure and real estate), is whether the service provider is vertically integrated and has a wider geographical presence. Also, many of the larger service groups are arranged so that the private equity system never talks with the private debt system, and neither system talks to the real estate system, and so on.
A single manager juggling a private equity, debt, and real estate vehicle across multiple jurisdictions is looking for a reporting solution containing consistent data delivered in a timely manner. A single manager won’t want to have their data managed across three different systems which are, likely, run by three separate teams of their service provider. The objective should be an ecosystem around the data life cycle using technology and based on collaboration.
IR: Outsourcing can help GPs to focus on what they do best, however, just like they need to build a solid rapport with their service representative (in, say, matters of fund accounting, tax or custody), the systems between the client and the provider need to be properly implemented as well. In a perfect world, both sides will be using eFront solutions, but even if they do not, that data needs to flow smoothly back and forth. Ideally, it would reside in a centralised accessible location to maximise its value for all stakeholders. Data collection and distribution can be a burden, but if handled well, can prove to be a competitive advantage.