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COVID-19: Accelerating Change in Alternative Asset Servicing

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COVID-19: Accelerating Change in Alternative Asset Servicing COVID -19 ACCELERATING CHANGE IN ALTERNATIVE ASSET SERVICING While investors are still evaluating the impact of the current crisis in an uncertain environment, the pandemic has created the opportunity to accelerate data and technology trends in servicing alternative assets. Having a comprehensive strategy, underpinned by advanced technology and better data solutions, will be crucial to thriving in the post-COVID future. COV I D-19 Accelerating Change in Alternative Asset Servicing Until early 2020, the consensus was that the alternative investment market would continue to grow at a healthy pace, reaching USD14 trillion by 2023 from USD10 trillion at the end of 2019, a new record.* With the solid growth of alternative assets and the shrinking of U.S. public markets, the industry saw a frenzy of activity in terms of asset owners (and asset managers) moving into alternative investments, with new startups, acquisitions and partnerships in the alternatives vendor landscape. When the COVID-19 pandemic hit, there was a period of uncertainty that took over the market, particularly around alternative investment allocations. How would investor sentiment react to an asset class that is mostly illiquid and manual with longer time horizons? However, alternative allocations RAPHAELLE GRANGER have not slowed down following the pandemic. In fact, interest in the asset class increased. According Lead Product Manager, to Northern Trust’s asset servicing data, asset owner clients’ alternative assets positions are on track Alternative Asset Services Northern Trust to increase in volume by 10% in 2020, similar to the increase in trends seen in 2018 and 2019. Other emerging trends gained pace during the early stages of the pandemic, such as the integration of environmental, social and governance (ESG) into alternative investment portfolios. While ESG investments were seen as “nice to have” in good times, COVID-19 has elevated the According to Northern Trust’s asset conversation, particularly on the social aspect of ESG, on how private companies treat and protect servicing data, asset owner clients’ their employees, deploy sustainable approaches and use government grants and loans. alternative assets positions are on track As these trends continue, efforts to automate processes and digitize assets have moved to the to increase in volume by 10% in 2020, forefront as remote work has become the default workplace setting. The industry is reconsidering similar to the increase trends seen in 2018 and 2019. how it operates and how it can continue to build on some of the visualization that has become the norm in everyday business practice. While investors are still evaluating the impact of the current crisis in an uncertain environment, the pandemic has created the opportunity to accelerate data and technology trends in servicing alternative assets. Having a comprehensive strategy, underpinned by advanced technology and better data solutions, will be crucial to thriving in the post-COVID future. *Preqin. Alternatives in 2020, February 2020 Asset Servicing at Northern Trust 2 COVID-19: ACCELERATING CHANGE IN ALTERNATIVE INVESTMENTS COMPREHENSIVE DATA STRATEGY Increased portfolio allocations had already put the focus on the need to have a solid data strategy to service all stakeholders – front to back – and all asset classes from venture capital to hedge funds to private debt. When the onset In a remote work environment, the need for of the COVID-19 pandemic resulted in an unprecedented shock to portfolios, there was and continues to be even more efficiency and cost savings further make the interest in understanding what is happening at the portfolio company level to measure risk and liquidity. No analytics case for adoption of machine learning company has the expertise in every domain, and this makes the case for further industry data partnerships to flourish. frameworks in alternatives. EVOLUTION OF TECHNOLOGY In general, even before the pandemic, institutional investors sought more advanced technology solutions from their alternative investment providers. Partnering artificial intelligence with human intelligence started showing real potential in the space recently as validated by the number of startups that have reached the Series A stage. Until two years ago, alternative investments proved to be a challenge to automate due to the variety of formats used by managers and lack of industry standards. However, with cloud technology and more availability of open source software, progress is being made with document recognition and accuracy rates, including capturing data in footnotes. In a remote work environment, the need for efficiency and cost savings further make the case for adoption of machine learning frameworks in alternatives. Since March 2020, the challenges of manual entry coupled with work from home have increased, highlighting key person risk and the importance of operational resiliency and the ability to transfer work quickly and reliably from one location to another. While artificial intelligence may not remove the need for specialized knowledge to normalize data, there have been strides in streamlining manual data entry and calculations. Advancements in machine learning frameworks can also potentially reduce the pressure on GPs to fill standard templates if tools can be developed and automation allows the industry to move away from a manual approach. Hence there is incentive both on GPs and LPs to find success in artificial intelligence initiatives. Beyond automating the traditional functions of alternative asset servicing – accounting, performance, transparency and liquidity – alternative providers have a considerable role to play in providing specific data sets necessary for investors to model their risk management or valuation support. Machine learning will also be key in developing solutions for ESG tracking as there is no consistent approach to data in that area. From a transaction perspective, there are still many manual aspects in trade placement processes where reliance on faxes and emails is high. Automation can be introduced that will improve the process of filling subscription and redemption documents. Blockchain is a key technology that can be leveraged to automate transactions. Overall, though the move to work from home proved to be easier than anticipated even in countries where it was not the norm, the pandemic demonstrated the need for acceleration in the use of digitization. Asset Servicing at Northern Trust 3 COVID-19: ACCELERATING CHANGE IN ALTERNATIVE INVESTMENTS INTEGRATED, MULTI-ASSET SOLUTIONS IN A VIRTUAL WORLD Data management continues to be a focus for alternative asset investments. Over the past two years, market demand has increased for multi-asset class solutions and integrated data platforms. Although private and public allocations are For asset owners that need deep analytics usually run separately, boards and CIOs need consolidated views of their portfolios, whether it is for performance for their alternative investment portfolios, benchmarking or risk analysis. multi-asset class aggregation tools and In response, several acquisitions or partnerships between specialized fintech providers – either software platforms or portfolio management solutions provide specialized managed services – and big financial firms have been announced. Northern Trust, for instance, partnered a technology solution. with Parilux in launching Front Office Solutions in 2018, an offering that helps alleviate operational burdens and improve decision support required by asset owners and allocators with in-house investment teams. For asset owners that need deep analytics for their alternative investment portfolio, multi-asset class aggregation tools and portfolio management solutions provide a technology solution. In a virtual world, the move to integrate solutions becomes even more critical to minimize manual processing between functions. Further consolidation of the vendor market may occur, for example, with analytics or asset management firms that have limited alternative capabilities. At the same time, further development of tools such as APIs that automate the transfer of data should be mandated in internal developments. Overall, based on the challenges of working from home, the COVID-19 pandemic response should accelerate the development of integrated and comprehensive investment and asset servicing infrastructures to effectively run an alternative investment allocation on a virtual basis. NEW WAY OF WORKING FOR ALTERNATIVE ASSETS While the alternative asset servicing industry has continued to grow during the COVID-19 pandemic, embraced the move to work from home, and adapted quickly to virtualization, this new way of working has emphasized the need to accelerate digitization. As a heavily paper-based asset class with fewer industry standards, alternative investment has much to gain from automation and multi-asset class solutions in a virtual world. Asset Servicing at Northern Trust 4 COVID-19: ACCELERATING CHANGE IN ALTERNATIVE INVESTMENTS © 2021 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert,
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