As fee pressure, rising costs, and intense competition continue to bear down on global asset managers, so too does the allure of two diverging migratory paths for assets.
On one hand, simple strategies continue to thrive. ETFs have consistently set growth records over the past five years and seen assets under management more than double. Conversely, more expensive, niche or complex strategies in the alternatives space such as private equity, hedge funds, and other boutique strategies, have also grown steadily since the financial crisis and are witnessing a sustained capital influx.
The scale of competition in this space is on track for a cool $20 trillion in alternative assets by 2020. All while diversification abounds, as yield-hungry investors pile into new asset classes, geographies and ever more complex financial structures. In this environment, there is a decisive role for technological innovation as an enabler for much-needed investment in renewable infrastructure.
In the decade since the crash, the ever-increasing intensity of regulatory oversight has matched these inflows every step of the way. And with this increased regulatory scrutiny, comes demands from both regulators and investors; for increasingly specialised data, enhanced transparency and traceability. The continued pervasiveness of ESG, and its explosion in popularity in recent years, has meant accounting for such criteria has become critical to prudent money managers.
Within this alternatives space, it is the real assets universe that is forecast to be the fastest-growing area of alternatives over the next five years. (Preqin) However, it is in the real assets space where one can find the last of the large investment strategies attempting to rely on legacy technology solutions to drive decision making, and risk/return analysis. As these systems start to fail, innovation is now vital to growth and innovation. Competitors are already moving in this direction, so it is the first movers who are at an advantage.
Robust, reliable data, and the ability to separate the signal from the noise, is key to good decision making. In the real assets space, however, the situation is quickly spiralling out of control. Across the industry siloed departments and unwieldy systems permeate. Far too often are today’s fundraising, investing, asset management teams disconnected, serving only to chip away at investor confidence increasing operation risk and diminish returns.
Operating in this manner provokes needless operational inefficiencies, impacting the speed and accuracy of business decisions. The longer these practices continue unabated, the greater the hidden risks compound – a single spreadsheet error can have dire consequences.
Looking to other industries, SaaS technology continues to revolutionise the way we do business. Salesforce immediately springs to mind; in how they have changed the way companies manage and track their relationships with customers across sectors. Microsoft’s Office 365 now outsells its packaged begetter, and the firm’s recent acquisition of online software development platform Github is illustrative of the success that the collaborative spirit of SaaS can engender.
By connecting all key teams; from fundraising, to investing and asset management, firms can accelerate collaboration and mitigate hidden operational risks. The ability to harness and control data, dynamically connect financial models, and deliver advanced analytics and business intelligence in real-time, is key to growth.
Looking to 2019, it is the technology laggards who will falter, as demand for new standards in fast, data-driven compliance/reporting (including ESG) will rise. We know the demand is there; according to a CFA Institute survey, over 50% of respondents among portfolio managers and research analysts said it was the lack of robust data that was hindering greater adoption of ESG across their investment portfolios, with this being a particular concern for asset owners.
You can be sure GPs will only increase their demands for greater employment of technology by LPs over the coming years. With infrastructure set to double in assets over the next five, and as LPs look to increase their allocations into these areas, the prize is too great to be anywhere else but ahead of the pack.
Haresh Patel, CEO of Mercatus