ASSET ALLOCATOR SPOTLIGHT

 

The esoteric and complex nature of alternative asset classes creates an increasingly complex data problem for asset owners. FundFire sat down with three experts from Northern Trust to learn how asset owners can effectively overcome the data challenge.

 

By Mark Austin, Sally Surgeon, and John Turney | June 2023

As seen in FundFire, June 2023

Accessing accurate, timely and comparable data is one of the biggest challenges facing asset owners when allocating to alternative assets – it also one of the most important.

To discuss these challenges and the potential solutions, FundFire spoke to three Northern Trust experts: Mark Austin, Pensions and Insurance Executive for EMEA; Sally Surgeon, Head of Client Services and Head of Sydney Office; and John Turney, Global Head of Front Office Solutions.

FundFire: What kinds of data do asset owners need to manage their portfolios effectively? And what challenges do they face in gathering this information?

John Turney: Today, most alternative asset data is unstructured and not digitized. Asset owners are dealing with PDFs, emails, phone calls, and various other data delivery methods, and there is no standard way to sort that information. Across the lifecycle of these assets, there are various input points, and the result is a data stream that doesn’t necessarily tie across different investments. At the end of the day, asset owners are responsible for managing and aggregating all this unstructured data, which is a huge undertaking.

Mark Austin: Asset owners can have everything from direct property through to a participation in a venture capital fund, but each of those subsets of alternatives tends to be vertical. Bringing together all that data is difficult. New types of investment are being added, too, while the data has still not caught up.

Sally Surgeon: Asset owners have to manage a huge number of documents, so solutions around document storage are quite appealing, as well as trying to reduce some of the administration around capturing that data. Due to the nature of alternative investments and the lack of data normalization, each manager will have different formats for providing information to asset owners and there will also be differences in data elements across investment types. This leads us to the crux of the issue: the lack of standardization, combined with the increased volume of information, requires significant effort to manually consolidate which can be associated with increased risk of error.

How does this vary between, for example, pension funds, insurance companies, and endowments?

MA: It comes down to in-house resources. For example, an insurance company will likely have a large team at its disposal and may have the in-house capability to tackle the data complexities. For the more concentrated organizations, they don’t have the luxury of quite as many people, so they have a greater need for a technology solution.

SS: Whether it’s sovereign wealth funds, superannuation funds, or other asset owner organizations, today most include an array of alternative investments within their asset allocation. The larger funds, particularly, have the benefit of scale to invest in alternatives but then also have an increased demand for data management capabilities.

JT: The challenge grows as you allocate more heavily to alternative assets. Endowments and foundations, for example, have been leaders in allocating to alternatives and they’ve been dealing with the data challenge for a long time. As other investors continue to increase allocations to private equity, or venture capital, or real estate assets, they’ve taken on new data management challenges.

How does this challenge differ between private markets asset classes?

SS: The data required to monitor a buyout deal is different from the data needed to monitor real estate debt servicing, for example. Each different private market asset class has unique data characteristics that need to be tracked, and, as John pointed out, the tracking is not standardized across the industry.

MA: You not only have to overcome bringing that data in from many different sources, but also it can come from different jurisdictions. The reporting from individual administrators might be heavily driven by their individual underlying countries’ regulators or conventions.

How can asset owners best work with their service providers and asset managers to get the most from their data?

MA: We find clients come to us with a data problem and ask us to help solve it, but first we must establish what they want to do with the data. Working with them to define what they think the data will bring them is important – whether it’s greater transparency, faster reporting, enhanced management, or improved performance. Once we understand this we can determine how to best capture and represent that data.

JT: There has been a headlong rush to the solution phase without slowing down and understanding the use cases. Particularly when you’re dealing with alternatives, and all the challenges that we’ve already discussed, there is so much risk of wasted effort and wasted investment if you don’t understand those use cases.

What is Northern Trust doing to improve the data situation?

SS: There are a variety of services we can provide. For example, with capital call execution we make it easier for asset owners to instruct us on each capital call by following a set of predetermined rules authorized by the client. Scalable solutions like these can really benefit asset owners, and they also ensure we process and record information efficiently.

It’s not just about technology and automation: it’s about combining that with expertise to understand the nuances of the various alternative investments - how they are processed and reported and what constitutes valuable insights.

JT: At Northern Trust, we are bringing scale to the solution. If a client’s internal resources are limited, we can provide some relief there. Also, we have invested in technology to automate processing for alternative assets that is benefiting our partners across the industry. These types of larger scale projects will ultimately solve data challenges in a way that’s difficult for clients to achieve on an individual basis.

Looking to the future, what is the key message for asset owners to understand?

MA: Allocations are going to get bigger, and the data challenge will get more complex. Solving these problems for asset owners is of paramount importance.

JT: Many of these investors are at a tipping point. They have processes that worked when alternatives were less than 5% of the portfolio, but will they work when the allocation is 10%, or greater? Given the weight of those allocations today, we have to solve this challenge at scale.

SS: Alternative assets form a key component of an overall portfolio, so there is a need to be able to combine the elements of alternatives with listed assets and provide that total portfolio view for the asset owner. The need for scalable solutions, whether it’s data, technology, automation – demand is going to continue to grow.

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