The use of alternative investments has been gaining steam over the last several years. Asset owners and managers are seeking diversification, higher yields in a low interest rate environment, and/or trying to differentiate their product offerings with attractive risk vs reward. Though many managers have incorporated alternative investments into their strategy, few have an operating model that is optimized for these strategies. Whether dipping your toe in the alternative waters for the first time or scaling up to handle increased allocation, firms looking to optimize their operating model for alternatives should assess these four key questions:
What is the scope of your investments?
Alternative and private assets span many things including limited partnerships (LP’s), co-investments, direct investments, joint ventures, and more. And the nature of assets includes private equity, private debt, real estate, infrastructure, equipment, mortgage loans, and other asset securitizations. Ensuring you have a comprehensive understanding of the asset types and structures sets the stage for the operational, technical, and personnel capabilities needed to support an alternatives optimized operating model.
What are required staffing skillsets?
Alternative investing not only requires specialized ‘investment management capabilities, but specialized operational knowledge to support these asset types once a deal is executed. While typical functions such as data sourcing, asset set-up, cash processing, and reconciliation sound similar to traditional public asset support functions, there are distinct nuances which require SMEs with more sophisticated skillsets. Cutting corners on your staffing model introduces increased operational risks.
What are required operational processes?
As alluded to above, alternative investing requires supplemental operational processes that differ from traditional asset classes—and there is less process standardization due to counterparty capability maturity (e.g., General Partners). Asset managers will often attempt to tweak their traditional asset processes to supports alternatives, as opposed to designing alternative specific processes with distinct underlying technology capabilities (referenced in next paragraph) and specialized SMEs (noted in the prior paragraph). Firms that recognize and account for process differentiation will be rewarded with a stronger operational control framework and less process risk.
What are required technology capabilities?
An alternatives technology strategy must align to support the business and its operational processes. This means having applications, platforms, and tools designed to handle the in-scope alternative asset types. Supplementing your existing traditional platforms with manual workarounds (e.g., Excel), degradation of existing data fields, and other unintended functionality will leave a firm exposed and at risk to scale. Solutions that are purpose built to support assets like real estate, private equity, and private loans will enable more streamlined and automated processes.
An alternatives technology strategy must also align with an asset manager’s overall investment management technology strategy, with proper integration points to ensure end clients receive a complete view of their portfolios. Many clients are seeing the benefits of combined alternative and traditional investing strategies, and therefore demanding top level and drill-down views from a data and performance perspective. Implementing a cohesive, holistic application architecture enables these capabilities.
In summary, investing in alternative strategies provides asset owners and managers with expanded opportunities and benefits, however, the operational and technology capabilities to support these unique investments should not be overlooked. Firms that design and implement a well thought out alternatives operating model aligned with their enterprise model will be best positioned to support and scale their business. The good news is that several vendors and service providers have emerged to offer alternative-specific based platforms and solutions, with convergence starting to happen with traditional asset platforms. All of this brings potential options when evaluating the aforementioned questions. Failing to properly address these considerations will inevitably detract bottom line gains from your alternative investments strategy.