How transparent is an asset manager with data for institutional investors? Before COVID-19, an allocator asking for more access to data may have seemed mistrustful. Now trust is based on knowing no data is being hidden.
Some funds are able to perform under this pressure, and at the same time may counterintuitively have fewer accountants, either internally or through their fund administrators. They may have more data scientists in an operations role, however.
Firms with stronger data operations, like Neuberger Berman and Pershing, signaled their capability to communicate better—in the months before COVID-19—by announcing new client data portals for instance. They weren’t planning for COVID-19, but they were planning for the world this pandemic has rushed us into.
Due diligence
Chief investment officers are now combing through their portfolio to better understand how much is illiquid, or not as liquid as they thought.
CIOs are pushing asset managers for data on how funds and the portfolio are dealing with COVID-19. Funds are attempting to be consistent, and avoid selective disclosures. But as more calls come for where working capital stands, valuation and deal flow—asset managers’ middle and back office—are struggling to keep up.
The velocity of changes in valuations and calculating management fees, distribution waterfalls and claw-backs add to the pressure.
Statements are particularly difficult given that fund-level financials lean on portfolio companies and investment vehicles—which may be in disarray. Asset managers and their lawyers are poring over fund documents to look for room to go beyond standard statement deadlines, rather than shorten them. How do they provide disclosures on force majeure risk, for instance, in the current environment? Going past the 120-day mark can lead to problems with custody rule compliance.
Institutional investors who have alternative investment allocation caps are reviewing their investments to stay on the right side of the restriction.
Meanwhile, 29% of due diligence officers said at the beginning of March they had stopped on-site meetings. That number has almost certainly gone to near 100%. Videoconferencing has taken over to read body language, and more fluid sharing of data has become paramount.
In the good old days
Back when there were investor conferences, many events and fireside chats with fund superstars dug into how insights are uncovered through data. Practically no questions were asked about operations, unless the answers could inform investment insights. That might have been an understandable mistake.
Doubts about active funds in favor of more quantitative shops last year, and talk of a recession spurred LPs to ask for more visibility into the numbers. Now it’s required.
It may prick the ego of fund managers that want to be known for brilliant ideas rather than informative reporting dashboards and the implied accountability those dashboards represent. But dashboards are the new edge.
Easier said than done
Some funds can now deliver substantially more rapid reporting on more fund data, and they are setting a new standard. In a crash, understanding and being able to recheck the underlying investment strategy, by seeing it at work in near real time, can be more comforting than just having seen the most recent positive returns at regular but well-spaced intervals without knowing the risks entailed.
How do the funds that have achieved more transparency do it? It’s more than just wanting to do it. It’s knowing how to implement quickly and effectively.
If you look under the hood, these funds may actually have fewer accountants, either internally or through their fund administrators, and yet they can deliver fund data incredibly fast and with greater accuracy.
With supervised machine learning, data operations have clocked 20% savings in year one of an upgrade. An 80% savings has been seen by year five. Timelines for reporting have been reduced in excess of 85%.
What you are gazing at in this scenario is the rise of a secret weapon, data science being used for operations, reaching beyond investment insights.
Spending more money to spend less
What to do if you are a fund chief operating officer? At first blush, COOs and CIOs have bigger concerns with a crash underway than spending more on enterprise technology. Business tech spending was slowing already according to Goldman Sachs. But while that was true in the aggregate, smart CIOs and COOs were putting the brakes on tech spending they saw as providing a marginal edge in favor of accelerating investments that were strategic necessities. Like data operations that can rise to LPs’ demands and keep the lights on.
This is particularly true for middle office service providers who have increasingly seen their services treated as a commodity. As funds have felt their own pressure to perform, they have passed that down to the middle office. Flat fees, and pressure to do more with less, have been exhausting. It has forced layoffs, mergers, and off-shoring even before the calamity now before us. None of these tactics solved the real problem.
Too often from the fund’s perspective, fund administration is glorified accounting, and why can’t it be done more cheaply? We all have to tighten our belts, the reasoning goes. There are signs that fund administration couldn’t cut any further already and needed a better solution.
If fund administration cuts too many corners and breaks, everything breaks. The smartest investment strategy executed on a faulty platform goes off to die. But an investment strategist whose amazing idea is now awful, but executed on top of an efficient, speedy, and transparent platform, might live to fight another day.
The New COO
Getting the platform right has required the rise of a new kind of COO and corresponding fund administrators, or maybe not officers with the exact title of COO, but who are focusing data science on operations.
Hallmarks of these leaders include their understanding of advanced technology and experience in the combination of soft and technical skills needed to migrate organizations to data-driven operations. As data-fluent investors press for more transparency, these COOs leverage the middle office to break through the limits of pre-digital approaches. Brilliant ideas don’t go wanting for funding because investors’ demands for managed transparency can’t be met.
The new COO understands where to find proven automated data extraction from general ledger systems, statements, and balances, providing data normalization, creating specialized data warehouses, and intelligently feeding client dashboards, reports, and service level agreements. They are connecting with the capacity to put that to work either internally or through third parties and advanced fund administrators.
The new COO for 2020 is streamlining workflows and innovating data operations, and the way business will be conducted in the new future. They anticipate needs, solve problems, and create intelligent solutions that work symbiotically with investments teams to make their work faster, more accurate, and more informed and transparent to investors.
Kevin Walkup is president and COO of the funds data services platform Harmonate.
Tags: COO, Coronavirus, data transparency, Harmonate, Liquidity, Neuberger Berman, Pershing, portfolio