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Alternative Assets-When Complexity, Not Capacity, is the Technology Challenge

By Ed Brandman, CIO, KKR & Co. L.P.

Ed Brandman, CIO, KKR & Co. L.P.

Getting bang for the buck with enterprise technology is challenging in any industry. The projects are large, expensive and by the time you’ve implemented the solution, expectations have often changed and as such, measuring success is hard. The investment managers of alternative assets including; private equity, alternative credit, real estate, energy and infrastructure have unique challenges. This stems from the complexity of products, the long dated nature of the financial commitments and specialized reporting requirements. The high quality experience people are having with consumer apps is further impacting the expectations internal enterprise users and external institutional clients have of technology.

Complexity is the root cause of a lot of the technology issues at alternative managers. It’s not a volume sensitivity problem. There are not tens of thousands of institutional investors or millions of retails investors or even thousands of assets. Yet, the complexity of owning entire companies, supporting highly structured capital from investors and dealing with global ownership, often rivals the complexity at the largest investment banks and traditional asset managers. All of this is handled by highly skilled but much smaller organizations. There are very few vendors that are focused exclusively on the data needs in this industry or the operational processes needed to scale platforms. There is no central repository of investments in private equity, energy or other “real assets”. Financial reporting and operating metrics are very unique when you are on the “private side” of the wall. Even in the alternative credit space, the data is hard to come by and requires multiple sources to verify. The movement of cash is generally through wire transfers, it gets uniquely tagged (return of capital, bridge financing, capital gains, etc.) and there is no settlement system like DTCC.

"The high quality experience people are having with consumer apps is further impacting the expectations internal enterprise users and external institutional clients have of technology"

This often results in significant internal software development to supplement the “plumbing” provided by third party client and financial reporting systems. This in turn means that firms need technology resources that deeply understand client, financial and tax requirements to solve the puzzles in front of them. Clients (also known as LPs for Limited Partners) are among the most sophisticated in the market, yet they themselves are constrained by their organization’s technology and operational budgets. Given the billions in institutional capital committed to funds, it is not surprising that they are very demanding of their managers (known as GPs for General Partners). However, the life span of a fund can complicate reporting. The largest private equity funds have a very long life span (15-20yrs). Not surprisingly, demands shift significantly over that time frame. Given how quickly technology and regulations now change this often leads to a mismatch on delivery of expectations between GPs and LPs, that take time to resolve and requires significant changes to technology and operations. Solving the technology complexity challenge comes into play across the entire business. This has been further complicated by a shift for many managers from private enterprises to public enterprises and more intensive SEC focus.

The funds structures, investment entities and client commitments to funds are complex and no vendor solution addresses them all. Unlike the “traditional” markets for stocks and bonds or even derivatives, there is no central marketplace for information. GPs have largely created this market over time and as the market continues to grow, vendors are providing better services but it is far from developed like the traditional capital markets. The most sophisticated clients have begun to request SMA structures for their alternative investing, yet those structures sit side-by-side with the funds. Certain SMA structures look to invest across the entire capital structure of a firm and invest across real asset classes. While there are commonalities, the tenure of funds, SMAs and the changing nature of the marketplace coupled with the changing needs of clients, means customization of an already complex platform rules the day. The growth of the industry depends on a unique partnership between those raising capital from investors, investment professionals doing deals and the business operations (legal, compliance, technology, finance and tax) teams that support all of them.

Adding to the challenge is the need for details in a world where timely details can be hard to come by and the user experience at both capturing information and using information is poor at best in many enterprises. The revolution in the consumer technology market that was led by apps on Apple devices has only heightened user (both GP and LP) expectations that things should be easier than they are today. The expectation that enterprise solutions, either internally or externally focused, should be as easy to use as the Apps on your iPhone is a real challenge corporate technology teams are facing daily.

There is hope. The alternative investment management industry has been a source of creativity and innovation for decades. It’s a segment of the market that investors with patient and significant capital have turned to when they are focused on long term returns. As the industry continues to mature and expand, that innovation focus is increasingly supported by innovative technology investments both developed internally and vendors focused on making a difference through in-house and SaaS solutions. These technology solutions are aiding in the capital formation process, improving the risk management of real asset ownership, responding to increased regulatory pressures and importantly, providing better transparency to LPs with increasingly complex reporting needs. The industry still needs better data standards and improved ways to electronically communicate. AltExchange and ILPA are two organizations trying to make a difference in both of these areas. The internal technology teams at GPs and LPs are ramping up their engagement to provide solutions to many of these problems and given the advancements in technology they can be very nimble. Leading vendors are upgrading their offerings to improve reporting, creating “golden source” data products and providing options to facilitate the transfer of data between GPs and LPs. This is likely to be a slow transition but hopefully a continual improvement process. The changing requirements for funds, the low tolerance for errors in reporting and new regulatory requirements as well as the complex work of identifying future needs up front means a lot of time and attention is needed to get things right.

Across the industry there are now proprietary platforms at the largest firms and vendor solutions for the mid and small end of the market focused on partnership and fund accounting, LP reporting, private equity/real asset portfolio management and risk. Firms are beginning to leverage new analytical tools to support the complex analysis of alternative investments to help in both the acquisition and sale of assets and improve the investor experience. While the absolute number of participants in these markets is small in relation to traditional asset management, the numbers are growing quickly as is the capital being allocated to funds. The need for ongoing technology investment is high.

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