May 15, 2020
The operational challenges faced by institutional investors investing in alternative assets is a growing problem. Preqin projects that by 2023 there will be $14 trillion assets under management in alternative asset classes. Despite the increasing allocation to alternatives, there is little growth in scalability to support these investments. As part of the 2019 InvestOps survey2, North American multi-asset investors highlighted their biggest challenges in supporting alternative assets. Their responses can be grouped in three primary challenges: lack of system consolidation, reporting time lags and associated transparency issues, and processing unstructured data. The recent webinar session hosted by SimCorp and featuring Cutter Associates and Danish pension fund ATP Group proved that those challenges are still very relevant when supporting alternative investments.3
Additional challenges arising from the COVID-19 epidemic test the current landscape for institutional investors across the spectrum of asset classes, but the particular challenges facing alternative investments introduce further complexity. If you are relying on a set of disconnected systems, it requires significant intervention to address how the alternative investment portfolio fits in the wider portfolio from a risk perspective. Given the reporting time lag and associated transparency issues, understanding valuations or expected cash flows for the current portfolio is especially challenging and impacts the ability to update pacing plans to achieve the desired allocations. Across the industry, the operational challenges are exacerbated by a remote work environment with little time for preparation.
Jon Chandler, Senior Research Analyst at Cutter Associates, confirmed at the webinar the issues highlighted by the investors in the InvestOps survey. “When supporting alternative investments and the unstructured data that come with these, many clients are wasting a lot of time on error-prone manual workflows and latency, accentuated by limitations and integration issues with point solutions – time that could have been spent on their main mission: alpha generation,” he said.
Through research on the alternative investment landscape with their global member organizations and vendors, Cutter has identified an increasing allocation to alternative assets of their members: 19% expected increases to their private equity allocations, 14% expected increases in real estate, and 40% expected increases to infrastructure. “But although our 2019 member survey showed that investments in real estate and infrastructure will continue to be on the increase, the risk of disruption (e.g. Amazon), systemic risk (e.g. global warming, pandemic, etc.), as well as lack of talent and continued investment opportunities make investors concerned how these risks might impact their long-term investments,” Jon Chandler added.
While investment management firms are not only increasing their allocation to alternative asset classes, Cutter has also found that they are increasing the complexity of their investments. From an increasing allocation to esoteric investments like music or video royalties to the impact of blockchain on real estate investments, Cutter has identified a growing trend in alternative investments that push the boundaries of their members’ current operational capabilities. “Looking forward, investments into new technology and increased operational efficiency will be the solution to all these concerns,” Jon Chandler remarked.
Jon Chandler, Senior Research Analyst, Cutter Associates
While more traditional in nature, the rise of direct investments and co-investments into alternative assets by multi-asset investment managers further stresses the need for improving their operational capabilities. The issues of adequately addressing staffing needs and supporting an asset class with an entirely different set of business processes from traditional investments have investment managers concerned about their corporate governance and ability to respond to investment decisions or regulatory requests in a timely manner.
While challenges attributed to the changing landscape for investing in alternative asset classes are growing, the challenges themselves are inherently similar to the three challenges identified in the InvestOps survey.
Specifically, firms are leveraging technology to address the issues outlined earlier. With an increased spend on technology investment, managers attempt to mitigate the issue of transparency and reporting time lags by onboarding their alternative assets to the same solution used for other classes. In hopes of easing the pain of unstructured data, some firms are turning to machine learning to remove the burden of processing data from highly skilled employees allowing them to concentrate on more value-added tasks. These firms are seeing the least operational impact during the COVID-19 epidemic.
There will likely be one lasting change from the current crisis according to Cutter Associates. “For many firms, particularly those not located in major financial centers, attracting talent has always posed a significant challenge when it comes to investing in and supporting alternative assets. But necessity is the mother of invention, and if there is at least one positive that we can take away from the COVID-19 crisis, it’s that we’re witnessing a paradigm shift across the industry. While many firms may have resisted allowing their staff to work remotely in the past, the COVID-19 crisis has shown them that it can be done. And that now creates an opportunity for many firms, as their talent pool has become much wider.”
Danish pension fund ATP Group offered their perspective in the webinar as a multi-asset investment manager with a large and growing allocation to alternative investments. With DKK 886 billion assets under management invested in fixed income, equities, funds, real estate, and infrastructure, ATP is the largest pension fund in Denmark. Their allocations to alternative investments include the more traditional private equity, infrastructure, and real estate funds but also direct and co-investments in infrastructure, real estate, and natural resources.
ATP had an ambition to transition their support of alternative asset classes from a best-of-breed system to a multi-asset class solution as this would enable the pension fund to simplify the operational and technology processes related to supporting alternatives. By consolidating systems they also believed they benefit from more transparency into their alternative asset investments. “The offering from SimCorp was attractive as it enabled us to get a unified platform for all our assets including alternatives, leverage strong IT support, avoid complex integration, and improve our existing look-through functionality,” said Bettina Amanda Bredøl, Finance Business Partner - P&I Finance (Pensions and Investments), ATP.
CutterResearch content is the proprietary property of Cutter Associates and our members who have entered into confidentiality agreements. It contains information that is proprietary and confidential to Cutter as well as to the vendors discussed within the reports (the "Vendors"). Disclosure of the information contained in the reports could cause irreparable harm to Cutter and/or the Vendors.
By selecting "I Agree" below, you agree to safeguard this information with the same care as your firm affords its own confidential information. You will not provide access to this information to anyone who is not an employee of your firm and will not distribute this information outside your firm. Furthermore, you will not provide access to this information to any employee of any subsidiary, unit, department or division of your firm that is engaged in any aspect of the software business involving third parties, including, without limitation, selling or otherwise providing software to third parties, assisting third parties in the selection or implementation of software, or providing investment related software information to third parties (collectively, the "Prohibited Recipients").