Balancing alternative investments and infrastructure projects

Over the last few weeks I have had the pleasure of travelling in North America as well as the Middle East and meeting with a number of our clients.

Will Trout, Head of Wealth Management Research, Celent, explains the benefits of integrating your alternative assets on a consolidated platform.

Coming out into the market, always gives me a chance to observe first hand some of the mega trends in the asset management industry that analysts such as EY and Deloitte are often referencing in their reports. On this trip in particular, I got to see first-hand the growing appetite for alternative investments.

The asset owners that I met with are all concerned about getting a long-term return on their investments in order to meet their pension and/or insurance liabilities in the future. With interest rates being so low and stock picking getting harder in a market that some see as over-priced, then the hunt is on for alternative investments that have a solid and stable cash flow in the years ahead.

This means building capabilities to invest in asset classes that are not very liquid and where pricing is not readily available but based on business plans and projections about the future. As we all know, the hardest thing to predict is indeed the future, and for investments that have 10-50 year long investment terms this becomes a real challenge.

When investing in an infrastructure project to build a new highway for example, firms need to consider a huge amount of factors, including whether the rise of driverless cars will impact the number of cars on the road and whether there will be a future willingness to pay a fee for driving on such a road. The same can be said of an investment in a new train system or a large renewable energy project.

In Canada for instance, the pension funds were among the first to adopt this investment strategy and they have seen the great benefits from it. As a side note, there is a certain charm in visiting a client in Canada that owns Copenhagen Airport, the airport I use most frequently and which is just 10 km away from our headquarters in Copenhagen.

Copenhagen Airport

Systems to support alternative investments

Enabling the systems for these alternative types of investments is not easy either. As a significant amount of the assets under management (AUM) gets invested into these asset classes then one needs to account for them in all aspects of the investment cycle, including compliance and risk. In the past, the thinking has been that these investments can be managed in separate systems that are specialized for each asset class, for example, Private Equity investments can be in a separate system. That is less feasible now as firms want to understand the full exposure to sectors, currencies etc. across all assets.

This has led to a number of the investment management firms that I met with to ask for a consolidated investment book of record (IBOR) that holds all assets, whether they are liquid or illiquid. Large asset managers in particular are looking to consolidate their systems and get rid of costly integration points and customized data warehouses.

At SimCorp, we have set out to build out our IBOR to also include alternative investments and have delivered the functionality required for debt and will over the next year also deliver what is needed for private equity and real estate. We look forward to breaking new ground and being the first vendor that delivers a system that truly embraces all asset classes.

Finally, during my time in the Middle East I had the opportunity to once again witness first-hand how investing can make a difference for future generations. Investing the proceeds from the oil coming out of the ground for future generations is a challenge that many oil rich countries struggle with. It requires advanced strategies capable of dealing with significant amounts of assets under management that must be invested on a global scale.

Image of Dubai skyline

It was humbling during these trips to meet the professionals who are doing their best to make sure that assets in pension and oil funds are managed with future generations in mind. This is where alternative investments can play a vital role, and I’m proud that we can provide a solution to help manage such investments.