2024 Trends, Themes, and Predictions: Expanding Operating Models for Private Markets

Where private market investments were once deemed as a choice only for the most risk tolerant investor, asset managers and asset owners have been increasing their investments in alternative asset classes over the past two decades. As they recognize the potential to diversify their portfolios and generate higher returns, firms have seen an explosion in AUM in private markets. During this same time, we’ve seen a host of technological advances and a corresponding effort by firms to incorporate technology and resources to develop and mature their operating models. By many accounts, much progress has been made. The problem? The focus of this operating model work has been to the benefit of supporting public market investments.

But in introducing alternative asset classes to their portfolios, firms also introduced disparate data and manual processes to patch together support for these investments. Support for private markets continued to lag within multi-asset firms, and these investments are no longer a small allocation of AUM. Over the past five-plus years, the vendor community has made notable progress in offering solutions that support private markets, but the level of automation and maturity of these solutions still significantly trails public markets.

In the last few years, however, we have seen a shift in thinking, with many drivers pushing firms to consider their target operating models from a multi-asset view ─ inclusive of considerations for private market investments to support risk-and-return analysis within investment processes. Regulations are one example. Jurisdictions around the globe are taking into account ESG legislation and its impact on both public and private markets. Meanwhile, regulators in Australia are increasing the level of scrutiny on the valuation of direct investments.

Looking Ahead

We see firms broadening their operational functions to support alternative investments throughout the investment lifecycle. Firms are paying particular focus to data models and governance to support improved data quality. They are also focusing on supporting a combined investment view for strategy, overlay, and ESG purposes. And valuation processes require adjustment aligned to source and frequency.

While asset managers and asset owners have struggled to deal with all the data and manual processes necessary to support private investments, they are searching for the best support models, software, and service opportunities. They’re examining their operating models to expand the range of private investments and to cater to their unique requirements. And firms are also looking at their ecosystem of vendors that support these models.

To that end, we see vendors and service providers extending their offerings to support alternative investments. Some offer managed services such as data collection for private markets. Vendors like BlackRock (eFront), Dynamo, S&P (iLEVEL), and SimCorp are all expanding private markets support with solutions and/or services for data collection. But many other vendors also offer managed or outsourced services and incorporate AI in myriad ways to support alternative asset classes. Many vendors are also consolidating to further their functional support.

The point? As Cutter member firms lack sufficient tools to handle increasing volume and complexity of alternative asset classes, they’re reviewing operating models to better support these asset classes. We know that no silver bullet exists that will cover everything, yet asset managers must fill gaps and improve efficiency. We believe that firms will focus more heavily on the implementation of new technology. We expect that asset managers and asset owners will continue maturing their operating models for private market investments and assess how their vendor ecosystems can help.

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