Private funds: Ready your tech before the next investor wave hits
Anduin's CSO and Co-Founder Alin Bui recently wrote for Global Banking & Finance. See the original article here.
Private markets: A tidal wave is coming
The private markets anticipate boom times ahead, with predictions reaching $20 trillion by 2026. As fast as private markets are growing, they lack the infrastructure to scale properly.
Despite promising vision to investors and funding innovation, the private markets are trapped in the 20th century when it comes to how they do business.
Bigger funds have scaled by simply hiring staff, despite the challenging recruiting environment, but smaller funds are price-sensitive about operations and adopting technology. This wouldn’t matter much if momentous change were not coming—but coming it is, and soon. The anticipated tidal wave of high net worth individuals (HNWIs) and retail investors surging into alternative assets will change the calculus for all private funds. HNWI investors are under-allocated into alternative assets, but that will change.
Most funds want their share of this investor population explosion.
Whether they actively target this population today, forward-thinking managers and their service providers should prepare their operations infrastructure so they have the capability to bring on thousands of investors if they so choose.
Their existing paper-intensive workflows wouldn’t be able to handle any large influx. These manual onboarding processes need to be re-engineered.
There’s more to consider: The private markets have a serious problem of data fragmentation. Retail investors use banking and investment applications daily that are friendly, transparent, and streamlined. They can easily open accounts, trade, and move money in the public markets and expect a good user experience throughout. Not so in the private markets, where fund managers and investors still slog through transactions manually, collecting and exchanging information via Word documents and PDFs. Their information is primarily paper-bound. Each startup and fund defines its own structures for reporting data. That makes it very challenging to compare investments and build internal models for tracking returns.
Internally, firms rely on multiple disparate single-function systems that span the front office, the middle office, and the back office, including CRM and GL applications that don’t talk well to each other. Into this mixture, add email, Excel, Docusign, GoogleDocs, and shared drives that cluster data into confusing pockets.
Lastly, the PDf or .DOCX is by default the single source of truth about investors. Good luck finding the data you need when you need it as it’s most likely scattered across multiple documents in various shared drives.
Fund managers: Old processes or new investors—choose one
Private market investor onboarding is fraught with friction and transactions echo the inefficiency of stock markets during the ticker tape era. Sensitive paperwork attached to emails and legal paperwork filled out by pen are the norm. While these methods are troublesome today, they won’t be viable once HNWI and retail investors pile in. A fund that tracks due diligence for its investors in a spreadsheet is choosing an unsustainable and often insecure way to manage a high-volume business. Manual approaches virtually guarantee a bad experience for new investors with likely data entry errors and possible compliance issues.
If their onboarding gives investors a headache, they may drop out and go elsewhere. For experienced investors, small aggravations accumulate as they repeatedly provide their information with minor variations across documents and funds. For neophyte investors, navigating the maze of unfamiliar jargon and legal logic in transaction documents is daunting. The subscription agreement can seem rife with risk and liability. New investors in particular may pull up short and ask, “Why isn’t this as straightforward as signing up with a stock brokerage?”
Funds and investors alike may not yet realize the opportunity costs incurred with existing analog processes.
Calculate the costs of wasted energies, staff turnover, data errors, and even capital withheld, and fund managers see it is clearly advantageous to update with suitable technology solutions.
What holds back digital transformation in private markets?
When the floodgates open for new classes of investors, private markets need to be ready with technologies that can support this future. Unless advisors and funds plan to rely entirely upon third-party marketplace platforms to feed in HNWI investors, they will need to bolster their own technology stack. In particular, private market leaders need to invest in data integration, electronic onboarding, workflow automation, and data unification.
The traditional CRM, general ledger, and data room applications in the fund’s default stack are industry-agnostic or based on user-unfriendly legacy technology. They don’t add up to a holistic view of workflow and data across critical business functions. None of these solutions were designed to tackle the flood of HNWIs that will require operational scale and improved experiences and services.
I know from my experience that often legacy technologies are entrenched and not easily dislodged. A data integration strategy needs to be defined, whether it’s for a private equity firm trying to compare operational metrics across its portfolio or a fund seeking to provide transparency to an institutional investor. The need for a master data view integrated with multiple sources is clear. A traditional data warehouse could be burdensome. Alternatively, a logical virtualization overlay across these federated data sources would allow for consolidation of data without needing to migrate or duplicate data. API integrations and robotic process automation facilitate sharing data from disparate systems.
When to retool for a better experience
For funds considering digital transformation, the best time is at the very beginning: during formation of a fund management company. The next best time, for fund firms already in operation, is now.
The most valuable step to update is investor onboarding.
The subscription documents already act as the de facto golden record for key investor data. A holistic onboarding solution for private funds ensures a minimal-hassle experience for investors and lays the foundation for the critical system of record. It captures data at origination and does away with transcription errors by piping investor data downstream without manual handoffs. Along with straight-through processing, such a solution can improve data quality by giving investors automated guidance and validation during data entry. It provides a rational structure for data that helps point toward standardization across the industry, while also reducing costs and improving accuracy.
Data quality and standardization
The best way to leverage high-quality data flowing is to expand the scope of workflow automation further downstream. Automating capital calls and distributions, for example, also yields more consistent and better qualified data, by imposing guide rails on user input.
Investor data collected for a single fund may end up siloed and disconnected from data harvested from other funds. Normalizing data into a unified data model is a holy grail for private markets. Lack of standardization remains a primary obstacle to effective data exchanges between entities across the industry. The industry’s continued reliance on sharing information via static PDF reports hosted on web portals won’t keep pace with investor pressure to evolve.
So how many new investors will participate in private markets? With stock market risks and inflation biting their savings, many late-career professionals and retirees are likely to direct substantial amounts of their retirement treasure chests into non-correlated products. They will demand more extensive data services and the streamlined experience they know from their consumer banking and brokerage applications. These demographics will drive changes in how private markets operate.
The pressing question for private funds: How long will they delay the inevitable updates needed to improve the overall experience for their investors?