How are firms changing their data management strategies to improve investment operations and what is the increasingly relevant role of Artificial Intelligence (AI)?
In a recent Markets Media webinar, Duncan Cooper, Chief Data Officer at Northern Trust Asset Servicing, Miguel Castaneda, Partner at private markets advisory firm Alpha Alternatives (formerly Lionpoint Group), and Tom McHugh, CEO and Co-founder of FINBOURNE Technology, shared their perspectives.
Over the last 10 years, new technologies have allowed firms to capture greater volumes of data with increasing granularity. The types of data firms are dealing with is also largely unstructured and from a wide variety of sources, yet it still requires the same level of governance and control.
What are the key drivers instigating improvements in investment operations and the implementation of data strategies?
The amount of data has grown exponentially in all organizations and firms are now dealing with more diverse and more complex data. This is driving a change in the way firms think about and interact with data. Data silos have become more prominent and there is an ever-greater need for data across teams. Clients need a better way to communicate across functional silos to do their day-to-day work.
“One of the current challenges that we’ve seen is a lot of clients have legacy file exchange methods that are either SFDP or flat file uploads and they come in different formats and cadences, whether it be real time, daily, weekly, quarterly,” said Miguel Castaneda at Alpha Alternatives (formerly Lionpoint Group). “When an issue comes up there is a lot of emailing back and forth, resending and reloading. That causes delays across all the teams in the front middle and back office that need access to that data,” Castaneda said.
Where should a firm start with establishing a modern data strategy?
The first step is to conduct a thorough audit of where they are now and where they would like to go so that they can be strategic about what their data infrastructure should look like.
“Understanding how much data they are dealing with, where the data is going and the rate of decay or entropy of that data is a really good place to start.” – Duncan Cooper, Northern Trust.
According to Tom McHugh at FINBOURNE, firms often lack a clear understanding of the data terminology. Firms should first get a handle on what terms such as data lakes and lake houses really mean, and then look at their processing on top of it.
“It boils down to three things: what are you going to use it for, who cares about it, and who is responsible? Who really owns it and who cares if it is not right? If they can solve that little panacea, everything else tends to be just technology that works around it.” – Tom McHugh, FINBOURNE.
The panelists were clear that firms should focus first on the process and the business need rather than just looking at the shiniest new tools. “What money will they save, what potential revenue could they open up, what risks could they mitigate? How will they get a better understanding of their data within the organization to be able to understand where potential risks may be or how they can optimize the business?” Cooper said.
“It is incumbent on good technology vendors to not necessarily sell what they have, but actually look at what solutions people need. That is easier said than done, but it breeds better outcomes.” – Tom McHugh, FINBOURNE.
What is the view on realistic uptake and the application of AI in data management within investment operations today?
Artificial Intelligence is seeing a lot of hype for its ability to process data at scale, but it is not yet widely used in financial services. “People want AI in their technologies, but do not always understand the costs involved,” said Castaneda. It is not just the AI models and compute power, but all the upfront energy that goes into creating a data strategy or a data environment to enable AI.
“Firms should approach AI incrementally, and not just in terms of technology, but also in terms of people, process and data.” – Miguel Castaneda, Alpha Alternatives (formerly Lionpoint Group).
Firms have been very cautious with using AI, according to McHugh. People are using AI to provide meeting summaries and as an email assistant. But in the rest of financial services, people are wondering if they have the right to train the model on data they are looking at. It is unclear who owns the product of that. There is no real standard on digital rights for market data, for reference data and for the customer’s data. And firms have not yet put in the necessary safety rails for people to be comfortable using AI, McHugh said.
If AI can help in the workflow and give a helpful suggestion or automate a task in an overall workflow, where a human is still in the loop, that is a good use case for now, said McHugh. The technology will evolve and become a more expected feature, but firms need to make sure they have the right governance and security in place to know what happens once they enable AI.
Individual Investors Are Driving Growth in Private Markets
Traditionally, high-net-worth individuals and family offices have struggled to invest in private markets, in spite of their high collective AUM. In this article, Myles Milston, Co-Founder and CEO of Globacap gives insight into how technology is opening up access to private markets for private investors and analyses how increasing allocations from these investors will affect the market.
Private markets are experiencing a boom. Allocations are significantly increasing across the board from all types of investors. High-net-worth individuals (HNWIs) and family office investors are no exception to this rule. Diversification into private markets is now a strategic must-have for investors, particularly as the market faces higher levels of volatility.
This is a huge moment for individual investors, who aren’t letting this opportunity escape them – individual investors are set to invest an additional $1 trillion of retail assets into alternatives over the coming five years.
Private investors now oversee a sizable proportion of worldwide AUM, given the substantial growth in private wealth in recent years. The collective private markets assets under management (AUM) of family offices have more than doubled in the last 10 years, and the number of global private wealth owners is set to increase by 28.1% by 2028.
This positions HNWIs as key catalysts for future growth in private markets. But why are private market allocations growing at such an increased rate and how will this affect the real economy? economy?
Private markets pique investors’ attention
Private markets have made huge strides forward in recent years. Over the past decade, they have increased funding, boosted liquidity and embraced automation and technology, making them an attractive alternative to investing in public markets.
While EMEIA IPO activity continues to shrink, private markets are beginning to function more smoothly, quicker, more efficiently, and at a greater scale than before.
Private companies planning to list and those that have already gone public are increasingly finding private markets more attractive. This is because companies can now access the funding and liquidity they need while avoiding the complexity and expense of going public.
For investors, private markets offer a variety of benefits. Not least among them are the higher returns and stability they often provide, doubling as a strong hedge against inflation. Private markets also give investors a chance to invest in the real economy, diversifying away from more traditional stocks and bond investing routes.
Now expected to grow at double the rate of public assets, private markets are predicted to reach an AUM of between $60 trillion and $65 trillion by 2032.
Barriers to investing private markets
Historically, HNWIs and family offices have faced challenges in accessing private assets, and it’s been cost-prohibitive for private markets-focused funds to offer access at scale. Slow transaction times, often taking weeks to process, combined with low liquidity and funding levels have kept investors reluctant to engage with the space.
Specifically, HNWIs and family offices’ small size often acts as a barrier to entry into the market. With typically lower AUM and high minimum investment requirements that are common for private market opportunities such as private equity or venture capital, HNWIs and family offices are often unable to invest.
In addition, regulation also prevents individual investors from entering private markets, as they need to be officially certified as having a high net worth or as sophisticated investors. To be certified, investors must have an income of at least £170,000 and net assets of at least £430,000 over the last financial year, preventing many from participating in the market.
However, strides forward in private markets’ technology have reduced transaction times and opened up accessibility to make private markets an attractive alternative to traditional public markets. Advances in workflow automation software, for instance, are bringing private markets’ efficiency in line with that of public markets.
Additionally, new technology and products, such as digital nominee solutions that offer alternatives to traditional structures such as SPVs and feeder vehicles, have made it feasible for asset managers to take HNWI investment at scale efficiently by pooling smaller ticket investors under a single LP.
As a result, interest from private investors in allocating greater portions of wealth into private markets is on the rise. In fact, new research shows that nearly half (46%) of family offices see an increased focus on private markets as a key area of difference for the next generation’s investments.
Driving the economy with increased participation
Investors of all types are eager for a slice of the lucrative private markets pie, with this becoming one of the more exciting areas of the market in recent years. Private investors’ flexibility means that they are particularly well-positioned to adapt quickly and take advantage of any new opportunities.
Historically, HNWIs and family offices have found it difficult to access the lucrative returns on offer in private markets. However, access is being widened for these investors through new technology such as digital nominee structures, empowering them to become more involved in this area of the investment market.
Growing incoming allocations from private wealth, along with bolstered private markets AUM and more seamless access to investments could provide a significant boost to the economy by unlocking trillions of dollars’ worth of new capital for investment in companies globally.