By Mahesh Narayan, Institutional Asset Management Head, Arcesium
It’s diversification season for asset managers as they seek to capture a slice of the ongoing private credit market boom. In May, Goldman Sachs made headlines with its $20 billion raise for private markets business, and BlackRock has been vocally bullish about its future in private credit.
Market pressures have pushed many institutional asset managers to adopt a new playbook that embraces private markets investments, and specifically private credit, to new degrees. Fueling this trend further is regulatory reform and burdens on public companies that have encouraged businesses to stay private for longer, as well as opportunities in the private lending space created by bank retrenchment. All of these factors have collided to create an environment where traditional asset managers and private markets investors are now vying for the same investment opportunities, resulting in true cross-asset class convergence.
Complexity mounts
And while it seems as if all corners of the industry are moving into the private markets at speed, actually deploying these strategies effectively and scaling with success brings many challenges. Nowhere are these going to be felt more intensely than by asset managers who are blending the public and private markets together in their businesses in greater degrees than ever before.
The upsides of diversifying are clear. In addition to better returns, managers stand to gain the benefit of greater diversification, lower volatility, as well as stronger appeal to new investors. But the reshaping of their product mix will have a significant impact on their operations and underlying data systems, all of which must be addressed early if firms hope to thrive in these new levels of complexity.
An explosion of data
A move into the private markets means an increased risk of data fragmentation. Integrating private investments requires firms to incorporate datasets from new partners, vendors, and administrators as well as a number of new forms of information. Without a unified data strategy and the technology to support it, asset managers will find themselves hamstrung by siloed data systems that either don’t provide the intelligence required for informed decision-making, or require excessive manual efforts that drain resources.
Because of the many nuances of private market investments, data platforms that work for public markets portfolios often fall short when it comes to integrating private markets strategies. Having severe data gaps or inefficient data-based workflows will hinder proper risk assessments, such as visibility into credit facility availability and corresponding liquidity requirements, putting firms and their investors at risk.
New waters for traditional asset managers
The private markets ecosystem also brings with it a host of unique characteristics when it comes to valuations, investment lifecycles, liquidity, and risk. Asset managers moving into the private credit space will find themselves needing to leverage data in new ways, as investing in private credit instruments introduces a number of new data complexities including custom payment schedules and modeling specificities, as well as fundraising and investor reporting processes that require new forms of performance metrics.
Asset managers will also have to contend with an array of unfamiliar investment lifecycle events. A move into private credit will see the introduction of complexities across multiple workflows, such as new amortization schedules, custom coupon calculations and onerous data gathering from sources like loan servicers, transfer agents, and agent notices . Asset managers may also need to be able to accurately map term loan contracts and tranches of pooled loan investments to parent credit facilities, and they will likely face new reconciliation challenges when it comes to advanced entity matching.
Operations and data management systems will face an onslaught of new requirements. This means that asset managers moving further into the private markets can quickly find themselves with a technology infrastructure problem that calls for their systems to learn an entirely new language – and fast.
To avoid a one-step forward, two-steps back scenario, asset managers need to ensure that their infrastructure can cut through the fog of complex investment lifecycles. A golden thread of data will be their north star, and being able to automate operational workflows with a unified data strategy will be key to reducing risk, cost, and manual errors.
Transparency and control
It’s not just their private markets investments which require a solid data strategy, as asset managers diversify, they also need to be able to generate a holistic view of both their public and private activity for intelligent position management.
By drawing on a single source of trustworthy data, liquid and illiquid investment teams can work together effectively – for example, by creating an aggregation of holdings, performance, cash flows, risk analytics, and reporting, while still maintaining separate front-office systems.
With data connected in one easily accessible system, operations and reporting teams can get the data they need to perform their roles, while portfolio managers can holistically see exposure, and will have the ability to create blended funds across both liquid and illiquid assets.
As convergence becomes more commonplace in today’s financial markets, having a data model that can ingest transactions, holdings, and lifecycle events across illiquid and tradeable assets is the edge that asset managers need to set their business apart when it comes to decision making and reporting.
Accurately calculating performance across public and private investments is challenging. While standardized methods exist for tradeable assets, such as P&L calculations, private assets often require unique metrics, and there is certainly no standard to combine the two. Harmonizing disparate methodologies in a unified data system is essential to offer managers the flexibility to create their own comprehensive performance reports which fit their specific needs.
Data as a doorway to growth
As strategies become more complex, data holds the key to growth. With the right technological infrastructure in place as they move into private markets, asset managers will have the ability to efficiently launch and scale blended strategies that differentiate them in the market, while allocating capital more effectively and providing investors with faster, more holistic reporting. Furthermore, a robust data framework will open the door to advanced data science initiatives, enabling more sophisticated analysis and insights in the future.
The competitive edge of asset-agnostic technology
The expansion of private markets is set to continue, with analysts at Preqin projecting AUMs to surpass $18.3 trillion by 2027. But when blending the public and private markets, asset managers can’t simply teach an old technology dog new tricks.
They need systems that support the most complex portfolios spanning public and private markets on one platform – allowing them to standardize the investment lifecycle, reduce operational overhead, and minimize the risk of maintaining multiple systems. Only then will firms have the ability to fulfill their hopes of driving greater ROI which drove them to these new strategies in the first place.
