SHIFTING SANDS IN SPECIALIST INVESTMENTS

Developments over the past year have made change inevitable say Andrew Thornton, CEO of Internos Global Investors and Guillaume Fiastre, CEO of Taliance

The world of private investment has changed dramatically over the last 12 months. New sources of capital are flooding the market, against the background of low interest rates, leading asset managers to explore new frontiers to build more structured solutions and find investments to put this capital to work.

The path ahead is now cleared for the burgeoning asset class of alternative investments, but it comes alongside ever more intense scrutiny from investors, compliance teams and regulators.

There is no other choice for asset managers but to succeed in combining those traditional bywords of successful businesses: agility and security.

A complex new world is emerging

The amount of money invested in alternative investments has gone up from around $2.5 trillion at the beginning of 2000 to an expected $13 trillion in 2020. That’s a quintupling in size in just 16 years (source: PwC).Alternative investments are also a much larger proportion of global AUM now. In the past they were just a few percent of the value of a portfolio, now they make up anywhere between 15 – 20%. With such large percentages in play, the word ‘alternative’ is no longer adequate to describe such investments; some prefer to call them ‘specialist’ rather than ‘alternative’ investments.

With such a weight in global AUM now tied up in the alternatives market, asset managers are under increasing scrutiny from asset owners as well as regulators around the planet.

The ructions of the 2008 downturn, and the raft of new regulations (AIFMD, Solvency II, Dodd–Frank…) that followed in its wake represent an important period in the development of the burgeoning market.

Speed in acquisition: a key asset to success

Of course, while investment in the sector has increased hugely, the number of underlying real assets has not grown at anywhere near the same rate. That means a shortage of prime assets, high prices and increasing competition.

The trend we have seen for a couple of years is now becoming even more pronounced – accelerated acquisitions cycles. A few weeks ago we saw a core+ asset that was put on the market in the morning and was under option by the end of the same day. That kind of reactivity was not even conceivable a few months ago. The faster asset managers are in processing due-diligence, the better their reputation becomes on the market, and the more they end up with opportunities being presented to them.

Asset managers are seeking out opportunities wherever they can. They are into real estate, infrastructure, renewables, private equity – a plethora of different products, sectors and geographies. Asset management companies need to look at their investment portfolio as a whole. Asset allocation, compliance adherence and cash management all required faster turnaround to manage portfolios more effectively.

The pressure to have more sophisticated monitoring and due diligence processes is upping the ante to remain competitive. It is putting accounting and past-tense portfolio management very much on the back burner as a potential game changer and bringing forecasting and ‘what if’ analytics on an agile basis very much to the forefront.

Indeed, companies have to analyse data and make decisions infinitely faster than they did before to secure the right investments for their clients. It’s also important to havea much closer dialogue with the investors in order to build a strategy which is consistent with their risk vs yield objectives and which is achievable with the opportunities available on the market. This dialogue is based on reporting developed on the basis of accurate cash flow models investors can rely on and risk management process based on cold assumptions, cross border structuring and on reliable information about the assets.

This environment is becoming even more complex with the raft of new regulations that are now coming in the alternative investment market. Risk management processes are even more demanding and asset specific. Dealing with these developments requires quite a degree of reactivity and skills.

Relying on the right technology: a game changer

All these factors crank up the pressure. The above challenges have resulted both in an urgent demand for more agility and by extension new technology that can secure and accelerate all of the processes but not at the expense of accuracy.

Excel-centric organisations, heavily dependent on highly-skilled people, aren’t going to cut it.

We are seeing more and more investors proceeding with IT systems audits before they give a mandate to an asset manager. The level of complexity, the number of parameters to consider, the intricacy of economies are such that it can’t be managed solely by individuals. The treasure is getting the organisation to own the information. Today, it is in people’s heads/memories and in thousands of spreadsheets lost forever on hard drives. Asset by asset models have been developed here and there, but this level of agility now has to reach the fund level and the investor capitalisation tables to engage clients in investment decisions.

The solution is to adopt a platform that does provide a portfolio-wide consolidated view. A platform that can ingest disparate data and then fuel models both speedily and accurately, all the while adhering to a corporately-supported audit trail.

These kinds of systems enable asset managers to know their existing portfolio in detail and to assess new acquisitions and their impacts on cash, distribution, performance and risk instantly.

Moreover, new technologies like the GlobalAsset platform from Taliance, can easily result in asset agnostic models as asset managers never know what is going to be the next opportunity available (debt funds, FoF, RE, Infrastructure, Private Equity etc.). Corporately supported systems are able to combine this ability with strong risk management capabilities as they calculate and put at the disposal of asset managers the risk ratios, perform complex regulatory reporting and track changes in the assumptions and business models. So flexibility, transparency and security are an integrated part of all of the company’s processes

When data is of a high quality and available on demand across an organisation it’s easier to create models for stress testing, test multiple iterations and experiment with different assumptions and, importantly, do this quickly and as much as possible in real-time. It’s no good having the perfect model, if you take so much time to build it that you miss the chance to bid.