Read this article and learn about:
- Why firms with consolidated platforms are better prepared for alternative investments
- The need to boost support for Chief Investment Officers
- Why different alternative asset classes are still largely in their own separate solution for many firms
- The importance of having consistent, consolidated data for all asset classes
About the author:
Carol Penhale, CEO, Bedford Park Associates
The investment management industry is going through a metamorphosis for alternative investments similar to that for listed securities at the turn of the century. As consolidated asset platforms are necessary for more effective investment strategy execution, this article explores the challenges faced by investment managers today and how those firms with consolidated platform experience for listed securities are better prepared for managing consolidated alternative asset platforms going forward.
As the millennia was upon us, asset managers were struggling to keep up with due diligence demands, pre-trade compliance and consolidated reporting for equities, fixed income, and money market trades. If firms had comprehensive systems for trading, accounting and analytics, it was for equities – some had separate systems for fixed income and the Holy Grail of a consolidated platform for all listed securities was elusive.
In search of the Holy Grail
As firms began to acquire or build consolidated platforms for all listed securities, their ability to act swiftly for potential trade opportunities with solid understanding of the impact to their asset allocation and consolidated investment scenarios increased their competitiveness in the marketplace.
Fast forward to today as global investment in private investments is growing rapidly and the asset management industry is experiencing déjà vu with firms still seeking a consolidated platform – not just for listed securities now, but for their increasing asset allocation to private investments as well.
Firms increasing diversification with alternative assets as part of their asset allocation pie are facing the same watershed moment experienced with listed securities many years ago. The management of a consolidated view of listed securities in one platform of technology solutions is achievable today, but each alternative asset class is still largely in its own separate solution for many firms.
With an increasingly larger slice of the investment pie allocated to alternative investments, firms are struggling with the challenges of not having consistent, consolidated data.Carol Penhale, CEO, Bedford Park Associates
With an increasingly larger slice of the investment pie allocated to alternative investments, firms are struggling with the challenges of not having consistent, consolidated data for all asset classes for key functions such as compliance, risk, performance and cash positions on a timely enough basis to effectively manage their investment holdings and make informed decisions on potential new acquisitions.
A consolidated platform – also for alternative investments
Once again, the Holy Grail for sophisticated asset managers has become a consolidated platform – however, these days it includes not only the full range of listed securities (equities, fixed income, money market and derivatives) but also the growing complement of alternative investments (private equity, real estate, infrastructure, etc.). Asset classes are being added to the diversification pie faster than operations or technology can keep up with the demand for front, middle and back office needs for portfolio managers.
The need for a daily consolidated portfolio and cash view has become even more crucial for asset managers to manage investment risk with the increased exposure to alternatives. Listed securities offer liquidity, which is one of their strong investment appeals of exchange-traded securities, but private investments do not. Indeed, until recently they were referred to as the ‘illiquid’ part of the investment strategy by many asset managers. In lieu of liquidity, alternatives generally have offered higher rates of return, which is the attractive feature of them given performance by stock markets globally in recent years.
Ensuring sufficient cash flows is critical
Allocating larger sums to longer terms of illiquid alternative investments carries an additional challenge for consolidated portfolio strategies that include listed securities and external cash obligations. For alternative asset managers, there are three little words that require reflection and demand stress testing when making any new investments: negative cash flow. Ensuring cash flows are sufficient for both obligations and capital calls for private investments is critical – especially since private investments, once committed, are more onerous to dispose of for cash flow needs.
The increasing exposure to private investments puts greater pressure on cash flow needs and monitoring on ‘liquid’ portions of the portfolio. As long as the portfolio has a steady infusion of new cash, addressing go forward cash flow obligations is manageable. However, any cessation to the anticipated cash flow becomes an immediate problem – many asset managers will recall the repercussions of the sub-prime crisis of 2008 to their cash flow obligations and investment portfolios.
Determining the cash flow needs/availability on a daily basis to adequately aid expedited turnaround time on investments is increasingly difficult given the complexity of due diligence. Having this function further segmented with the absence of a consolidated platform for all asset classes adds complexity to producing the calculations on a timely basis with a reasonable sense of comfort in the numbers.
Lacking corporately supported tools, many still rely on Excel to cobble together their estimates of cash flows for existing and proposed new investments and asset allocation shifts.Carol Penhale, CEO, Bedford Park Associates
Lacking corporately supported tools, many still rely on Excel to cobble together their estimates of cash flows for existing and proposed new investments and asset allocation shifts. Using Excel as the ‘platform’, coupled with data that is not vetted or (equally a challenge) all the sources of data do not represent the same ‘snapshot in time’, represents a key process for due diligence and operational functions that is flagged in audit reports on an increasing basis.
Worse than not meeting the scrutiny of an audit, assembling the Excel picture is not timely enough for market execution compared to firms who have invested in technology. Those who have a consolidated platform for listed securities know the streamlined abilities they have for those assets. The inability to execute quick turnaround on due diligence for an asset class or the consolidated portfolio makes competitiveness an elusive target. Firms that have achieved a consolidated platform for listed securities see the dangers of the growth of the private side asset allocation without the same effort to reign in these asset classes into a cohesive technology environment.
Due diligence as a competitive differentiator
Accelerated due diligence as a competitive edge has become more acute for alternative investments in recent years, even for savvy seasoned players in the space. The demand for quality private investments far exceeds the supply which creates great challenges for firms with complex diversification of assets to make seasoned investment decisions using Excel on a timely enough basis.
As opposed to listed securities where the playing field is level for execution, private investments are very much about relationships. Many investment management firms struggling with establishing good relationships for quality product are also struggling with turnaround time internally to decide on an opportunity. The inability to assess the portfolio fit, compliance tests, risk tolerance and cash flow implications of a potential investment leave many firms with a difficult decision: they either continually miss out on good investment opportunities to others who can say ‘yes’ faster or they have to say ‘yes’ sooner with less due diligence. The latter scenario introduces risk to the consolidated portfolio and, unless very lucky, takes its toll over time on the asset allocation and investment objectives as a whole.