Fund managers can unlock the full value of big data by rethinking how the middle office handles it, says Thomas Erichsen of TMF Group Capital Markets Services.
Private equity funds must make better use of the wealth of data they have access to. The sector is around 10 years behind hedge funds in setting up robust middle office functions that create usable data to enhance performance.
The middle office - a compliance and risk management hub - has been in the shadow of the sales-focused front office. However, as more and more data passes through it, the demands placed on the middle office are greater than ever and deserve more attention.
There are more regulatory requirements, including the new Securitisation Regulation and associated criteria for designating certain securitisations as simple, transparent and standardised (STS). There are myriad measures needed for Environmental, Social and Governance (ESG) reporting, daily performance returns, enterprise risk and new client reporting. The middle office must support an increasingly diverse range of asset classes, such as private equity secondaries, which are now generally recognised as a proper asset class.
This increasing flow of unstructured big data, in tandem with heightened investor demand for data governance and quality, is a largely untapped source of value that can be mined to drive operational efficiency and inform better decision making.
At the recent British Private Equity and Venture Capital Association (BVCA) Summit, I moderated a roundtable discussion that examined changing fund manager behaviours. It seems that many are unable to take advantage of big data because of time constraints and other pressures and because their data is not properly organised, archived and retrievable. In short, it's not usable.
Fund managers, therefore, need to think beyond big data and consider the role of curated data which has been carefully aggregated, organised or enriched through additional third-party data. Curated data includes base data transformed through models to create various kinds of risk management and performance metrics and analysis. This can include portfolio holdings and exposure information, risk management statistics like Value at Risk (VaR), stress tests and performance calculations.
Curated data is slowly beginning to have an impact on the industry. A survey conducted by Greenwich Associates on behalf of IHS Markit polled more than 40 investment specialists. Some 74 per cent said that alternative data was starting to have a bigger impact on institutional investing.
In the coming years, good curated data will become more and more essential for underpinning sound investment strategies and risk management while feeding robust internal and external reporting, especially as regulators become more demanding. To make curated data truly useful and actionable, forward-looking fund managers should seek to implement the appropriate processes, controls and governance that builds up their data integrity.
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