Alternative investments (alternatives) are undergoing a transition from a niche set of investment products reserved for institutional investors and ultra/high-net-worth private clients, to a critical component of a balanced portfolio provided to a wide range of investor segments. As asset and wealth managers - serving as an alternatives distributor or a limited partner (LP) vehicle via fund-of-funds or new fund commitments - look to both preserve their client base and increase wallet share, client-specific alternatives strategies will become an increasingly integral part of an investment management offering.
Growing investor demand: As investor sophistication increases, multi-asset investing and the search for additional yield will require increasing accessibility. Alternatives will continue to be turned to as an additive and differentiating product in portfolios, providing stable income and inflation protection (real assets), low correlation to traditional products (hedge-funds), or higher risk-adjusted returns (private equity). The asset management arms of global banks must evolve their strategies and ensure an operating model strong enough to support the changing client tide effectively.
Expansion of global investors: As demand for alternatives increases, the potential market is expanding from all sides – the quantity and geographies of end-investors, and the number of managers and investment opportunities. Investors and managers can now allocate assets across emerging geographies offering attractive returns and diversification, and the level of investment customization and tailored solutions expected continues to increase. What’s more, as emerging markets continue to mature, untapped regions such as Asia Pacific and Africa provide a new set of investor capital for managers to access.
Technology and scalability: Technology is having a profound impact across the alternative investing value chain. From a limited partner (LP) or fund-of-fund manager perspective, advances in the ability to leverage data analytics tools and artificial intelligence for information gathering and deal origination. Additionally, the proliferation of new distribution platforms enhancing how investors access investment opportunities provide scalability and increase operational efficiency, driving down costs for firms, fees for investors, and the time it takes to locate and vet opportunities for investment.
Along with opportunity come challenges. The difficulty lies in determining the most efficient means of implementation, whether launching a net-new alternatives offering for clients or enhancing the existing offering to compete with both incumbent and emerging managers. Capco sees the critical challenges to consider in three categories:
Product and distribution:
- Regulation: Broader segments of clients are looking towards alternatives. However, the regulations and qualifications have yet to catch-up with the demand. Alternative products still require qualified-purchaser (QP) or accredited investor qualifications.
- Investment scarcity: Increased client demand and the proliferation of new managers have created an environment where deals and asset valuations are at an all-time high, creating competition for investments and the potential for inflated values and underperformance.
- Cost: Slower technology adoption by managers, the high-touch expectations and slower digital uptake by investors, and regulatory restrictions make alternatives more costly to distribute than traditional investments.
Operational efficiencies: With different alternatives products come vastly different operational and infrastructure requirements. Antiquated firm-wide tools and fragmented platforms for various asset classes increases the risk of creating heavily manual or administrative tasks, disjointed front-to-back transactions support, and siloed and duplicative technology.
Data quality and accessibility: Traditionally illiquid investment products can create reporting and accounting (timing) discrepancies with traditional products – monthly/quarterly versus daily. Resolving the issue of centralizing and structuring critical data – client, performance, cash/liquidity projections – and improving the timeliness and accuracy of viewing that data is crucial for both managers and front-office, and end-clients.
A robust framework and operating model to support a best-in-class alternative offering is critical to successfully executing on what Capco sees as a tremendous opportunity. Agnostic of the depth and intricacy of the products, and the sophistication of the target client segments, managing the complexities of alternative investments with a cohesive, optimized solution across people, process and technology will create an offering that allows managers to attract new investors, grow wallet share, and realize operational and technology efficiencies that benefit the entire firm.