Fund managers are looking for increasingly sophisticated data automation strategies, but cybersecurity and functionality must come first, say TMF Group's Andrew O'Shea and Oliver Sinclair.
TMF Group experts featured as keynote interviewees for a piece in April's edition of Private Equity International, which we are reproducing with permission below.
What are the key considerations when developing applications to support fund managers?
Andrew O'Shea: There is a myriad of technology solutions out there. The key point from our perspective is to select applications that can work well together as a holistic solution for clients. It is about functionality first and foremost, and then whether an application serves the needs of clients and if we can get it to fit as part of the technology stack with automated transferability of data between applications.
Oliver Sinclair: Driving this is a growing expectation for processes to be automated and efficient. Clients assume information will be available in real time and served up in a digestible, easy-to-consume format. The challenge for us is delivering that with solutions that are scalable but also flexible enough to respond when every client has their own bespoke requirements.
Those solutions also need to be accessible in an environment that is bulletproof from a cybersecurity and data protection perspective. There are ever-increasing demands from regulators in different jurisdictions and the technology needs to work in line with all those varying requirements.
What developments are you seeing in the use of technology to process nonfinancial data?
AO: The biggest non-financial area from our point of view is ESG data, where there is a huge demand for comprehensive, usable data across clients' investment portfolios. However, it goes beyond ESG and into portfolio analytics more generally, where the focus is no longer just on financial performance but on non-financial metrics that track the performance of an asset.
Every private markets investment comes with a business case that needs to be monitored and increasingly those KPIs are non-financial, such as supply chain resilience or staff retention rates. Managers need to collate that data and combine it with the core financial data, and then display it in a format that works for GPs and which they can pass on to their LPs.
OS: This is a particular challenge for private markets because the underlying data we are looking at is not consistent across portfolios; these mostly private companies are not being forced to produce standardised data sets. Public companies are much further ahead on this and that is a challenge we all need to solve.
What is driving the increased demand for real-time data?
OS: The driver for more real-time data comes from our everyday lives, where we have got used to being fed constant, instant data. If we have investments, we have dashboards on our phones that tell us how they are doing in real time and people now expect that across the board. The expectations of the younger generation coming into private markets are completely different to how it operated in the past.
The challenge is to provide that information in a private markets context in a way that is meaningful, because valuations in a private equity portfolio do not change on a daily basis, for example.
AO: The world has changed and you cannot expect institutional investors to place hundreds of millions of pounds with a GP and only receive quarterly reporting. The hedge fund industry has traditionally provided a lot more live data, so we need to bridge that gap.
The current geopolitical conditions demonstrate GPs' need to quickly understand the impact of events on their portfolios and share that information with investors. The ability to do scenario planning in the face of fast-moving events is another challenge.
What are the latest themes in information security and how can service providers ensure they have robust cybersecurity?
OS: I deal with our information security and cybersecurity teams on a daily basis. Each time we look at a new technology solution or vendor, or even when we are developing something in-house, we go through a rigorous process of due diligence and technical analysis to ensure it meets our requirements.
Over the last few years there has been much more acceptance of moving to a public cloud environment and there is now a widespread understanding that it is the most secure place to put data. There was a concern about the risks of the public cloud, but that tide has turned.
AO: In an outsourcing environment where GPs do not necessarily have the expertise themselves to build out that sort of security environment, they need to pick a partner that has a robust story on cybersecurity. We see an exponential increase in the due diligence that GPs perform on firms like ours when deciding to work with us or when reviewing arrangements on an annual basis. Clients need to be comfortable that not only their data is being handled discretely and safely, but that their investor data is handled with the utmost care.
In a highly regulated environment, the demands being placed on directors to have detailed knowledge themselves of cybersecurity within the business are also escalating.
What do you expect to be the hot topics in tech-enabled investing two or three years from now?
AO: There is huge demand for automation to drive speed and create cost-effective and scalable solutions that clients want to use. Our sales processes today no longer involve sales teams speaking to GPs and giving them comfort on the quality of our services. Now they involve a salesperson, an operations expert and our wider IT team talking to a potential client and giving detailed assurances on the robustness of what we can deliver and the speed at which we can do that. There is a constant expectation that we are investing more in data security and data analytics because those demands are growing and evolving all the time.
OS: Going forward, we are going to be building out solutions that are just starting to take root now and driving those across our clients' businesses. Any business in our space three years ago would have come with a great accounting tool and some limited capability for presenting data to GPs and LPs. Today, there is a requirement for new onboarding tools for investors, treasury tools, and workflow technology that tracks every deliverable and allows clients to view our activity in real time.
The next step will not be about delivering information on what has happened but instead on what will happen next, to help GPs plan for what will be coming down the line. If we can deliver those advanced analytics and insights, that data becomes even more valuable in its own right.
*This article originally featured in April's edition of Private Equity International. You can access it here.*
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