Investors are increasingly turning to alternative instruments for diversification, risk mitigation and to future-proof their returns, especially given today’s market conditions. This has resulted in surging interest in alternative investments from a wider variety of market participants, which is forcing the alternative asset servicing industry to adapt to new demands.
Sara Gilbert of Northern Trust reported that private equity was up 133% and private debt at 789%. “This influx of more institutional money with large allocations brings a challenge on the data that is required,” she said as she chaired a panel discussion on the subject at a recent Association of the Luxembourg Fund Industry (ALFI) PE/RE conference.
This increased demand also presents a challenge around efficiency, said Jörg Grossmann of Allfunds. “So far the entire access to the private market solutions, it’s very often a cumbersome, paper-based subscription process,” he said.
ESG also lagging
Tom Timmerman of MJ Hudson explained that the ESG sector is also lagging behind in digitisation. But he explained that some clients like it that way. However, the trend in ESG, driven by regulation, is towards confronting “more scrutiny along the entire investment chain,” pushing for further digitisation.
Timmerman gave the example of a client, a major limited partner (LP), which wanted to investigate the carbon emissions of all their assets, a very complex undertaking. “That’s unprecedented,” he said. “But we need efficient solutions to cater for that.”
UCITS got there first
Didier Delvaux of U.S. Bank, who has a 25-year background in the UCITS world, which he explained had already gone through the transition now facing the alternative sector. He characterised his experience of switching to private equity and private debt administration as being “Back to the future”. Delvaux explained that the UCITs field had adapted to digitalisation and standardisation.
The participants explained their approaches to meeting the challenge. Gilbert of Northern Trust said that her firm has approached efficiency “by digitising our operating models”. She explained that it uses a “best of breed” approach to service providers.
“The focus of our $65 million investment in technology over the next couple of years of our private capital business is on using automation to reduce touch points between us and the manager, and ultimately providing them timely and accurate data, in flexible reports and dashboards that they can share with their LPs and prospective investors,” she explained.
Grossmann mentioned that Allfunds is “currently developing solutions to facilitate the access to private market solutions for our distributors”
A sector in consolidation
Hana Prochaska of Aztec explained that the asset servicing industry is being transformed by strong consolidation activity in what is still a very fragmented industry, fuelled by strong growth in the industry. These firms are not being put off by the high prices being asked given the share prices for their acquisition, she said.
Highlighting her own firm’s decision to grow organically and not through acquisition, Prochaska explained that the asset servicing industry could be described as being very polarised, with each strategy having its pros and cons. She proudly reported that “over 40% of Aztec’s book of business has been migrated from our competitors, which only highlights the direction towards niche services with specialism in the asset class.”
Allfunds’ Grossmann explained that while there are “obvious benefits” having to do with economies of scale to be reached following the M&A route, “they don’t come automatically, because you may have different systems, different cultures etc. And you can realise these economies of scale only,if you are able to properly integrate the different companies and identify the best IT system that you want to use. And also integrating the people so that you create a coherent culture across the new combined company.”