The alternative investment market can only go so far without better data management says Carol Penhale, Chief Client Experience Officer, Taliance
The alternative and private investment market is growing at a phenomenal rate and now makes up 25 per cent of global investments compared to 6 per cent back in 2000. Analysts and other industry experts are clear that this is just the start. PwC suggests that alternative investments will pick up even more from now until 2020, with a 50 per cent year on year rise.
With expansion comes greater competition and diversification. There's increasing migration into private equity and real estate. Others are adopting classes such as infrastructure and going into real assets such as timber, agriculture and energy.
But, whether fund managers are dealing in mortgages, renewable energies or oil and gas, they still have the one priority; to manage risk of both the due diligence and monitoring processes. Yet, although they are investing millions, the alternative investment community is still behind the curve when it comes to technology. While some in the finance sector are making the most of sophisticated big data analytics and other high-tech complexities, the proportion of firms dealing in alternative investments that still rely on the humble Excel spreadsheet is very high.
Some might think this is satisfactory. After all, why change for the sake of it? However, like other sectors in the investment industry, alternatives are coming under greater scrutiny with more detailed and frequent reporting cycles becoming the norm. Regulatory influences are increasing as well. There's the passage of the AIFMD in Europe, and Dodd-Frank in the US. These are directly influencing investment managers. Basel III and Solvency II in Europe and FATCA out of the US will impact operational capabilities and work flows. Funds will need significant changes in business models, better/more granular data and adoption of front and middle office systems to comply with these regulations.
But external compliance issues are just the tip of this rigorous new landscape. Investors themselves and other stakeholders are becoming more demanding. They are looking for improved shock-testing, security, analysis and transparency – and up-to-date reporting based on better quality data. It's all part and parcel of the new zeitgeist.
It's a mammoth challenge for those who struggle with current timelines and cycles and historically have not kept information at such a granular level as the current climate now demands. Excel documents – however reliable and valuable they have been in the past – are no longer up to the job.
Typically a property manager, for example, will input data into a spreadsheet before passing it on to others such as asset and fund managers. Re-keying data is a common process with spreadsheets and pdfs, because the data is unstructured, it can't flow easily from one file to the next. Versions are distributed at every stage for more data or amendments and each time this happens, there's an opportunity for error. It's also difficult to tell when data has been updated. It's not clear whether changes were made yesterday or a month ago.
And although data modelling by spreadsheet is popular, it is restrictive. Tools created specifically for modelling can be far more effective, especially when it comes to future planning. Spreadsheets can't factor in the time dimension, for example – and financial modelling is really about assessing how parameters will evolve over weeks, months or years.
So is it time for the alternative investment community to be dragged into the big data era? The kicking and screaming part is optional, but all signs point to the fact that data governance and strong data management at the very least are becoming essential.
First steps are to consolidate data (but not build a data warehouse!) and ensure its integrity and reliability. IT support will be needed but it's primarily a business rather than a pure technology issue. It's just as important to have the right processes as it is to have the right software – and it's also vital that the team driving the project understands the underlying business uses of information.
Key to success is having a centralised, single database system that can be easily and quickly accessed and facilitate plug n' play of new data sources that are constantly arising. This will accelerate the transfer of data from property manager upwards and make the decision-making process more reliable.
The second key to success is to have the centralized source of data be agnostic to accounting, business and static data – all of which are required to run the business of alternative investments, not just accounting which has historically been the focus of attention for these types of investments.
Many fund managers are forced to find solutions for more transparency in reporting which is based on improved data quality and granularity. Under AIMFD, for example, over 130 pieces of data have to be reported to regulators – a significant demand in a world which previously had few formal reporting requirements.
But one of the plus points of a growing market space is that competition forces change. Investors who are new to the alternatives markets are bound to be careful and wary about who they choose to manage their funds. Proper systems and processes, along with accurate forecasts and timely reports will help gain trust and show that risk is under control.
Alternative investments may be on the rise. But growth can only go so far without a more serious and effective use of data.