Fund Operator Summit Recap: Navigating the Future of Fund Operations
By Stephanie Henwood-Darts
This week’s Fund Operator Summit, hosted in London, highlighted the recurring themes of Artificial Intelligence, Technology, and Data across keynotes, presentations, and panel discussions. The day began with a striking presentation on AI that left attendees pondering the future of human employment, with one quote suggesting, “There will be no jobs left for humans.” In contrast, the final panel discussion emphasized a "people-first" approach, prioritizing people, processes, and systems, in that order. This contrast highlighted the ongoing challenge in the industry: how to harness the power of AI while still valuing and leveraging human expertise.
A particularly thought-provoking moment for me came during a panel discussion on technology implementation strategies. Two contrasting viewpoints emerged:
The Problem-Centric Approach: One panelist advocated for starting with a clear identification of problems or areas for improvement before seeking technological solutions.
The Opportunity-Driven Approach: In contrast, another panelist proposed a more opportunistic strategy. This approach involves exploring technological possibilities first and then fitting them into the existing business model.
The consensus seemed to be that the optimal strategy likely lies somewhere between these two approaches, tailored to each organization's unique needs and goals.
Calum Chance, Author, Surviving AI discusses the immense power of AI and how it will change the world of work
The Power of Data in Private Assets
Data emerged as a critical factor in the success of private asset deals. The summit emphasized that while good data can make a deal, a lack of data can undoubtedly break it, and serve as a red flag for potential investors. Key takeaways include:
GPs must establish a robust technology infrastructure that facilitates easy data collection and centralization.
Clear communication of data requirements from GPs to their portfolio companies is crucial.
A data warehouse is essential for operational risk management and future-proofing, especially in private markets given the diverse systems and technologies meaning a 'best of breed' approach is often adopted.
The importance of open architecture for success, allowing all systems to funnel into a central source for effective analysis.
Service providers should ensure that the data they hold for clients can be easily integrated into the clients' systems or data warehouses.
The increasing importance of data has also reshaped recruitment strategies, with more firms seeking talent from technologically advanced industries to stay ahead in data utilization and innovation within private funds.
Democratization of Alternative Investments
Democratization has been a buzzword in the alternatives space over the past few years, and for good reason. The summit highlighted the growing number of retail investors entering this market, driven by both investor demand and managers seeking additional capital sources. Key factors fueling this trend include:
Increased Availability of Information: Greater media coverage and social media awareness have heightened demand due to the potential for higher returns.
Longer Private Company Lifecycles: Companies remaining private longer have reduced public market investment opportunities.
Generational Wealth Transfer: Younger generations controlling more capital show increased interest in "exotic" assets available through private markets.
While the U.S. currently leads Europe in this trend, Europe is catching up with government initiatives aimed at encouraging more active engagement in pensions, and improved frameworks like ELTIF 2.0.
However, challenges remain in opening this market, such as:
Institutional LP concerns: Fear of potential declines in service quality, driven by resource constraints for high volume nature of retail investors.
Data availability: A mismatch between the opaque nature of the private markets and data expectation.
Liquidity challenges: A misalignment between the liquidity needs of retail investors and inherently illiquid nature of alternative investments.
Regarding liquidity, managers must provide clear definitions of what liquidity means for their funds, including how fund strategies impact liquidity, the redemption process, and historical liquidity metrics. Secondary funds can also help bridge access for retail investors by providing liquidity solutions and enhancing valuation transparency. Other things to consider and pay attention to are the need to increase valuation frequency, improve access to portfolio company data, adopt an open architecture approach, and consider improving investor support and self-service products.
Matt Giodmaina, Rodney Hutchinson, Mario de Bergolis discuss harmonizing people and tools in a world of ever evolving systems and tech.
ESG: An Evolving Landscape
Discussions around Environmental, Social, and Governance (ESG) factors revealed notable insights:
A trend towards separating the three components to enhance transparency and enable targeted investor engagement.
Significant regional differences, with European investors exerting more pressure on managers to enhance and report on sustainability strategies compared to their U.S. counterparts.
Double materiality in Europe, while most other jurisdictions, including the U.S., continue to operate under single materiality. This approach to materiality could take years to change.
The crucial role of data in improving ESG focus as availability increases, costs reduce and trust in data accuracy grows.
The emergence of the International Sustainability Standards Board as the most important standard to follow in this context.
Looking Ahead: Transparency and Data-Driven Operations
The summit underscored a clear direction for the industry: transparency is becoming paramount for success in fund operations. This shift necessitates that data availability be at the heart of every operating model. We may soon see a world where GPs open their systems to Limited Partners through open architecture, making it crucial for firms and their partners to establish the right systems now to accommodate this shift.
Democratization is also poised to drive innovation in private markets over the next few years, likely further propelled by regulatory reporting pressures. The message is clear: embracing data-driven operations is not just beneficial—it's essential for survival and growth in the evolving landscape of fund management.
In conclusion, the Fund Operator Summit provided valuable insights into the current state and future direction of the industry. Data, or die.