Posted on 08 April 2022
Navigating the Continued Growth in Alternatives and Private Markets
Featuring Michael Muniz from Canoe Intelligence
With the alternatives market poised for further growth, what are the industry’s current challenges and how can technology, industry standards and expertise provide a solution? Michael Muniz, Partner and Chief Revenue Officer at Canoe Intelligence, recently sat down with Sensus Magazine to explore the implications of such rapid growth.
In an industry that has undergone several rapid transformations in recent years, it is safe to say that the alternative investment space has seen a particular spike in interest and innovation. Market forces are pushing investors toward historically overlooked or underdeveloped asset classes like never before, while the institutional community has long allocated large percentages to these markets.
As a result, firms that previously had little to no exposure to private markets have rushed to spin up new offerings, while those already in the space have worked to bring existing solutions to more and different kinds of clients.
This is a recipe for a rapid increase in complexity – and indeed, alternative and private markets often create significant operational complexity for investors,
allocators and asset servicers alike. Every new partner these firms onboard equates to time spent learning a new workflow, ensuring connectivity and checking for accuracy. With widespread interest in alternatives being a relatively recent phenomenon, the tools available to accelerate these processes are
limited. All this is occurring amid a backdrop of increasingly complicated remote workflows and decreasing headcount throughout the buy side and across asset classes, compounding the problem.
One thing seems clear: The alternatives boom is not going away any time soon. According to Preqin, a data provider focused on the alternative investment
space, alternative AUM more than doubled over the last decade and is projected to grow by an additional 59% by 2025. In this environment, there is an unprecedented need for specialized tools that can streamline processes and enable scale. They also need strong partnerships to help them navigate this
growth and react to new market forces and industry challenges, no matter how this trend evolves.
The Continued Rise of Alternatives
“Alternatives” is a fitting term – the name alone implies a break with the traditional in favor of new possibilities. Sure enough, the strong and growing interest in alternatives is a product of the fact that for many allocators and investors, portfolios comprised of stocks and bonds alone simply cannot meet
their evolving needs.
Some of this has to do with the nature of equity markets today. Put simply, stocks are very expensive – as of October 2021, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite are all at or very close to all-time highs. Bond yields also remain low. These trends led Charles Schwab to recently forecast that returns on stocks and bonds over the next decade will fall short of historical averages. Furthermore, the fact that alternatives have a low correlation with public markets helps limit portfolio volatility, which has become an especially relevant concern following the global financial crisis and again amid the Covid-19 pandemic.
The need to differentiate performance provides another powerful incentive for firms to wade into alternatives. The decline of active investing means it is harder than ever for traditional asset managers to develop that secret sauce that sets a portfolio apart from the rest. In this hyper-competitive environment,
allocators must seek new avenues to higher returns to fund spending needs and keep up with peers. Identifying a manager with robust technology and market-leading algorithms is one way; placing a greater emphasis on alternatives is another.
"As much promise as alternative investments offer, they have created new challenges for the allocators, managers and asset servicers who want to get into the space.”
Michael Muniz, Partner and Chief Revenue Officer at Canoe Intelligence
Devil's in the Details
As much promise as alternative investments offer, they have created new challenges for the allocators, managers and asset servicers who want to get into the space. These factors are preventing firms from navigating these markets with maximum efficiency, thereby limiting the overall opportunity.
Several of these factors deal with the operational realities of the private markets, where the sheer number of documents that must be exchanged can be overwhelming. Most of these are capital call notices, distribution notices or account statements, but there are others – K-1s, factsheets, quarterly financials, performance estimates, manager letters and more. Even documents from the same general partner (GP) can originate from different sources – emails, GP websites, administrator portals and the like. Throw in the need to deal with multiple sources from multiple GPs, and you start to get a sense of the complexity of document management in this space.
The challenge is not limited to keeping track of these documents – it is also in making sense of them. Limited Partners (LPs) need to extract information from these sources for a variety of purposes: tracking performance, reporting to clients, investment committees and regulators, balancing portfolios and
more. Unfortunately, this information is often buried, requiring large teams to manually perform detailed, page-by- page examinations to locate the pertinent elements. In a vacuum, this is painful; at scale, it is a nightmare. In effect, these documents are full of mission-critical, unstructured data, so
the challenges operations teams are facing are not unlike those of market data professionals who must clean and normalise vast datasets.
These challenges led to the introduction of guidelines like the Institutional Limited Partners Association (ILPA) Principles, which call for this data to be exchanged in standardised formats. While in theory this simplifies processes for LPs, it makes more work for the GPs, a dynamic that often motivates
managers to find workarounds. The result is more convoluted workflows for the GPs and even more time spent by LPs trying to find the investment data they need, ultimately diverting resources from value-creation tasks. This is an issue across industries – a 2018 reportfrom IDC, a global market intelligence
firm, found that data professionals lose up to 50% of their time each week because they cannot find, protect or prepare data – but it is especially acute
in the alternatives space.
That brings us to another, overarching challenge: Operations teams are spread thinner than ever before. While headcount is shrinking, the industry is growing more complex, client needs are expanding and compliance burdens are increasing. Beyond the workflow challenges, this leads to personal frustration and room for error. It is a difficult problem with no easy answer – and only a blend of technology, innovation and expertise can solve it.
Developing an Industry Standard
Financial technology firms like Canoe Intelligence are doing the crucial work of creating an industry standard approach for document and data management
using machine learning, AI, and natural language processing technologies. By doing this, capital allocators, institutional investors, wealth managers, and asset servicers can automate their workflows and ensure that operational inefficiency is not an impediment to reaching the markets they need to.
This article was originally published in the Sensus Magazine. Click the image to flip through our most recent issue or browse through our previous editions of the magazine.