Real estate businesses, like those in other sectors, know that their performance will increasingly depend on their ability to gather and analyze data. But few have yet mastered the processes, and identified the tools, that will allow them to do so in a cost-effective manner.

A common pitfall is to begin with the assumption that the answer is solely a matter of buying or building technology platforms, observes Gus Harris, head of data and analytics at fund administrator Alter Domus. Instead, he argues, technology should be viewed as an enabler for the smooth flow of data from its source to the decision-makers that utilize it, a process that can be facilitated by a trusted back-office provider.

What are the most pressing challenges for global investment managers’ and investors’ back and middle offices?

The market is expanding. As portfolios grow, managing those portfolios becomes more complicated. Allocating to a wider variety of alternative investment strategies, the scale in AUM that brings, and the intricacies of managing such assets internationally for a diversified client base that demands ever more nuanced risk-return profiles from their investments, increases cost and complexity.

Some of the data flowing back to investors from their portfolios may have been processed manually in the past, but those solutions are just not scalable today. Solutions that may have worked when asset managers had $1 billion under management are no longer effective when they have $30 billion or $50 billion.

Meanwhile, technology has matured significantly. The ability to automate, and to analyze data more efficiently has been greatly facilitated over the past 10 years, and now it is growing exponentially with the introduction of AI and other cutting-edge technologies. If managers fail to harness that capability, it affects their ability to grow scale, because the cost of doing so becomes exorbitant. In addition, if they are too expensive compared to their peers, investors will turn to more efficient managers that can provide them with more and better-quality information.

Asset managers that can charge lower fees and provide better data because they have smartly automated their operations will win out. We have reached the point where managing data is almost an existential issue for managers that want to grow scale.

What are the key considerations for managers seeking to take control of their data?

The first is accuracy and completeness. Data from different sources and contexts must be normalized so that it is directly comparable. It must also be gathered in a timely manner. The second challenge is scale. Whatever data solution a manager has in place needs to be able to scale vertically, so that they can add on more of what they want in a cost-efficient and timely way. It also needs to be able to scale horizontally, as the manager invests in new types of instruments. One of the current features of the market is how many new flavors of investment solution are being added all the time.

A third consideration is efficiency and cost-effectiveness. We hear from our clients that software providers will sometimes show them a solution that initially looks good, but when they start to use it is too costly to get the accurate, complete, normalized data that they need. Agility is also vital – the ability to build around the data solution. It cannot be built in isolation. To benefit from data in decision-making, market participants need to think about how they will use it, building solutions that can be incorporated into their corporate identity and asset management processes to make them more efficient. They need to consider the ecosystem that is going to support and live around the data solution.

Finally, it must be usable. Data solutions should be designed to help investors to make decisions when they are considering what to buy or sell, without them needing to be technologically-savvy. Using data better is not a technology problem, it is a decision-making problem. Technology is critical to solving it, but getting the design of that technology right, and building a supporting ecosystem around it, requires a combination of people and technology.

To what extent has the real estate industry embraced the digitization of private markets fund administration?

The good news is the industry sees the need. The market is sold on the idea that we must modernize and move to next generation capabilities to grow the alternative marketplace. Different providers, investors and managers are at different stages of the maturation process. There are not many sophisticated investors and managers out there who believe that the status quo as it was a couple of years ago is sufficient. Some have moved faster than others, and frankly, that’s fine.

What you don’t want to do is jump in with a solution that that you will regret later. We see a lot of that among clients who made technology-related decisions a year or two ago. Being a pioneer or first mover may not always be best, unless you first think through how it will work in practice. The pitfall is failing to understand when you make these decisions, what you are going to get at the other end, and how you are going to maintain and scale it.

What options are open to managers looking to improve their processes for managing data?

One is to work with a trusted back-office provider, especially one that has made a sizable investment and built out capabilities the way Alter Domus has over the past couple of years. Another option is for managers to do it in-house. That is a very challenging task. It is extremely expensive and keeping up with market standards may be difficult. Having said that, a lot of our clients are building modern solutions for their workflow. The two approaches are not mutually exclusive. A manager can have their admin provider be a big part of it, while also making changes themselves. Both need to take the journey at the same time and build solutions together.

A third option is for the manager to piece together various third-party solutions, licensing a variety of tools and applications from various providers and merging them into one integrated solution. That presents two major challenges. Firstly, they have effectively recharacterized the challenge as a technological challenge by hiring software providers that lack critical domain expertise. Therefore, the data they provide may not be as accurate and complete as the manager would desire. They will need their own team in place to make it fit for purpose. Secondly, they will have the extremely difficult job of connecting all the different solutions. Trying to solve those problems with several individual software providers can get extremely expensive.

How has Alter Domus, faced with more clients, more data, and more complex mandates, sought to meet those challenges?

We have made large investments in automating and scaling our capabilities to support our clients through our Accelerate program, which began two years ago. We have greatly enhanced the capabilities of our applications, workflows with our clients, and the delivery of data and analytic solutions to them. We are locked arm-in-arm with a lot of our clients on that journey.

Over that period, we have been doing the foundational work to aggregate data, tag it, build workflows, tools, engines, and analytics, all sitting underneath our storefront Vega platform. That provides a single, centralized platform where clients can access all the tech solutions they currently use and “shop” for others. And within Vega, if clients want an aggregated view of the data across their portfolios, they can access that through our Gateway application. That allows them to drill through all their funds to look at exposures and correlations.

How do you expect digital platforms to evolve in the future? Could artificial intelligence have an impact in this area?

Over the next couple of years, the market will be very busy tackling the challenges of data accuracy, scalability, efficiency, agility and usefulness. And along the way, technology will continue to evolve. At Alter Domus, while the data we are bringing into the Vega storefront is substantial, it is probably not complete.

As they become more successful at managing their data, clients will see the potential to keep growing these platforms, so that they could eventually become the single source of truth, lock stock and barrel, across their organizations. We are already incorporating elements of AI into our solutions, for document classification and document data extraction, for example.

As we get better at this, AI could be used to create widgets and applications that sit within the data ecosystem, providing tailored analytics and reports. However, it is critical to understand that without a clear focus and direction for using AI, organizations could just be spending a lot of time and money on theoretical impractical solutions. Our approach is to look for short term wins that show how AI could be part of the solution.

How can applying digital solutions benefit investors, and administrators working on their behalf?

Investors want to see performance. Employing digital solutions can help them to generate greater returns at a certain level of risk, as well as fine-tuning that risk and better identifying which risk they want to take. That is because they can perform analysis that they were not able to perform before, drilling through to the risk factors: credit risk, property risk, demographic risk.

That capability allows investors to greatly improve the performance of their portfolio. As well as improving performance at the individual asset level, you can also apply analysis across the portfolio in a way that has been difficult to do in private alternative markets up to now. It is very exciting what this opens for investors, and I am very confident we are going to get there as an industry.

This article was originally published in PERE’s Technology Report.

Alter Domus, a leading provider of tech-enabled fund administration, private debt, and corporate services for the alternative investment industry, has appointed Michael Janiszewski as its new Chief Operating Officer.

In this role, Michael will report to Doug Hart, Alter Domus Chief Executive Officer, and will also join Alter Domus’ Group Executive Board.

Michael brings significant executive experience in leading the operations of global organizations. His successful 20+ year track record spans business & strategy development, business transformation, operational excellence, and digital innovation. Mike joins Alter Domus from BNY Mellon’s Securities Services and Digital business, where he served as Chief Operating Officer.

Alter Domus CEO Doug Hart said: “We’re excited to combine Michael’s expansive background with Alter Domus’ industry leading private markets services platform. Our aligned vision of the future of alternative investment operations will accelerate the Company’s client experience initiatives day-one.”

Following his appointment, Michael Janiszewski, Alter Domus Chief Operating Officer, said: “I am proud to join Alter Domus and am excited by the bright future ahead of our organization. I am looking forward to partnering with the talented and experienced group of executive leaders on our Group Executive Board, as well as the talented professionals across Alter Domus.”

Michael holds a BA in Electrical Engineering and a Certificate in Applications of Computing from Princeton University, and an MBA in Finance, Accounting, Strategy, and Entrepreneurship from the University of Chicago Booth School of Business.

What challenges are private equity managers currently facing around liquidity and funding?

The difficult dealmaking environment is really steering all the liquidity issues that managers are facing right now. The fact that dealmaking has significant­ly slowed down over the last 12 to 18 months – and the same is true for fund­raising in the last six to nine months – is creating a bit of a challenge.

We still see managers observing the availability of follow-on investments or quality assets; the economy hasn’t stopped and there are plenty of oppor­tunities. However, LPs have slowed down their commitments because of a lack of liquidity, and that has created constraints. Institutional investors still believe in private equity, but they have been impacted by both a slowdown in distributions and the denominator effect. As a consequence, their own liquidity has become more correlated with other asset classes – this creates challenges for them.

For a long time, constrained private equity managers relied on subscription line financing, but in the wake of the regional banking crisis in the US at the start of this year there are now fewer lenders and slightly higher rates in that space. LPs are questioning the use of those facilities, which were always a bit of a short-term solution.

What financing options are PE funds embracing?

We have seen a growing number of cli­ents looking to GP-led secondaries as an interesting solution to the current challenges. This is taking place at both ends of the spectrum: GP-leds are being used as a means of providing liquidity to LPs, as well as a route to new funding for some of the assets in their portfolios.

In most of these deals, we are talk­ing about high-quality assets that might have been in the portfolio for a while, have been performing well, and the GP believes there is more value to be ex­tracted. A GP-led secondaries deal of­fers an opportunity to release liquidity to LPs that have been in the fund for some time so that they can continue to invest and re-up into the next fund.

In terms of other financing options, we still see sub lines being used a lot, while NAV financing solutions are also picking up steam. Those tools have been out there for many years, but they are receiving increased attention in the current climate. However, they are not without complexity.

From a lender perspective, the NAV financing market has started to evolve, with a wave of key players leaving leg­acy banks to join asset managers that are creating dedicated NAV financing funds. Those individuals really under­stand the asset class and are able to increase that velocity of distributions back to LPs so they can re-up with ex­isting managers.

The other issue here is the slow­down in exits, with the tide having shifted significantly in the last three or four years. LPs have turned their focus from IRRs to distributions, and while they understand that it is not always in the manager’s control to decide when to sell, at least with NAV financing they can achieve some predictability of cashflow. What’s more, this is not nec­essarily just for right now: we don’t see NAV financing going away, but rath­er becoming a much more commonly used liquidity tool for managers.

How would you describe the current health of the PE secondaries space?

The PE secondaries space is very healthy, both for GP-led and LP-led deals. Last year, GP-leds considerably outpaced LP-led transactions. That had more to do with the exit markets as managers didn’t want to be forced to sell when rolling LPs could see more runway. A lot of LPs chose to go into those deals because they weren’t ex­periencing quite the same liquidity crunch as we saw going into 2023. To­day, GP-leds are still getting done for high-quality assets.

On the other side of the equation, LP-led deals have picked up in 2023. Those deals are not trading at major discounts – they are right around NAV, or maybe at 80 or 90 percent – and there is a healthy volume of activity.

Immediately after the global finan­cial crisis, we saw LP-leds trading at 20 or 30 cents to the dollar, and at that point we started to see the use of defer­rals. Then portfolios started to mark to par, and sub lines came back into use.

Today, we are seeing another pick up in the use of deferrals, where a seller and buyer agree a price and then agree to defer some of that purchase price out a few years. Maybe a buyer is willing to pay closer to par on the valuation of the portfolio in that instance and the sell­er is willing to wait in exchange for a higher purchase price. For some selling LPs, the result is enough liquidity to bridge the gap they are facing thanks to a lack of distributions. It doesn’t work for everyone, however, with some sell­ers preferring to accept a purchase price at 80 percent of NAV for cash upfront.

What challenges do managers face when tapping the GP-led market?

One of the biggest challenges is under­standing and meeting the expectations of LPs. Most GPs are rolling more carry into a continuation vehicle and taking a bigger stake, because there is much more focus on alignment in these deals. LPs want to see managers put­ting more skin in the game.

Another issue is the SEC is putting a lot more regulatory focus on these deals, introducing a regulatory process around third-party valuations, for ex­ample. And, of course, the economics will be a little more friendly to the LP base in a continuation vehicle, which managers can find challenging.

Finally, there are the issues asso­ciated with convincing LPs that this is the right decision, which requires managers to be ready with the data on the portfolio company and with a plan of where they see things going. The transparency is something that most managers have caught up with, but the volume and frequency of data required from the portfolio is nevertheless a challenge.

The good news is that there is cap­ital available for these transactions and there are LPs that want to cash out, which means there is appetite on both sides.

What new trends do you expect to feature in the debt finance market over the next year or two?

We are seeing growing sophistication in the NAV financing market, shifting from a focus on lending from banks towards other funders with more li­quidity. No doubt over time we will see more use cases, and an industry that started out as pretty vanilla will attract more expert professionals.

We are also seeing a lot of clients struggling to achieve anything mean­ingful with capital call facilities because the banks are hesitant. Over time, we expect less reliance among PE man­agers on traditional bank lenders and more use of the tools being created by a new wave of asset managers who are combining private equity and credit market expertise.

This article was originally published in PEI’s Debt Finance Report.

Here are some key areas of the Final Rules that each private fund advisor will be responsible for, regardless of whether they are registered with the SEC or not:

• Quarterly Statement Rule 211(h)(1)-2
• Audit Rule 206(4)-10
• Compliance Rule 206(4)-7(b)
• Adviser-Led Secondaries Rule 211(h)(2)-1
• Preferential Treatment Rule 211(h)(2)-2
• Restricted Activities Rule 211(h)(2)-3 

With these rules in mind, here are five key things private fund advisors should be considering and preparing for now:

1. Become familiar with the required updates needed for private fund quarterly and annual audit reporting including required issuance dates, governing documents, policies, and procedures.
2. Consider any grandfathering clauses that may affect your requirements under the Restricted Activities Rule and Preferential Treatment Rule with respect to already existing agreements.
3. Start to work through how to incorporate additional transparency around private fund fees and expenses, including calculations and cross-reference to organizational documents, performance, and potential conflicts of interest.
4. Review preferential treatments currently in place for certain investors in a private fund or a similar pool of assets and become familiar with the disclosure requirements, or cessation, of the same, for current and prospective investors.
5. Assess the adoption dates for the new rules.

No one-size-fits-all approach

The nature and complexity of these reforms mean that firms need to take a proactive and individual approach to their compliance – there is no cookie-cutter solution.

With that in mind, here at Alter Domus, we are cognizant of the amount time and collaboration our clients will require across their own organization and across third party service providers, like ourselves.

The new requirements will have significant impacts on the timing and level of detail and disclosures required for quarterly and annual financial reporting, and as such, please get in touch with us to discuss our plans for preparation. Contact us below.

Secondaries in the spotlight

Fundraising for the secondaries market – where investors purchase securities or assets from other investors rather than directly themselves – has finally bounced back after steep falls from the highs experienced during covid-stricken 2020, with H1 2023 showing a 28% year on year jump. Indeed, the broadsheet financial media has been awash with reports of large players raising billions specifically for allocation to secondaries, with the pervading sense from market players that it’s been both undercapitalized and, to a degree, an undervalued part the alternatives eco-system.

While the actual volume of transaction for secondaries didn’t meet expectations in H1, market commentators seem to believe an incredibly robust H2 will make up for any shortfall. What’s clear is that the market has matured and grown in terms of sophistication with players on both sides of the equation using ever more sophisticated asset performance and sectoral data to guide their investment strategies.

Liquidity and economic uncertainty are the key drivers

As the saying goes, not all heroes wear capes, and in a period where liquidity has been increasingly scarce, the secondaries market has been a lever that both GPs and LPs can turn to and pull. If capital is the lifeblood of a financial system, then secondaries can be seen as an essential safety valve that allows that capital to keep flowing through the arteries, meeting investors need for liquidity.

What’s also helping secondaries seize the moment is the ongoing sense of uncertainty still gripping major economic markets. Investors seem either cautiously optimistic or cautious with regards to optimism as they wait to see whether interest rates and inflation will begin to properly descend. On the private equity front, this ever-present uncertainty – the bête noir of deals – has kept the under-performance of 2022 rolling deep into 2023: reigned in investments, blocked exists, and stymied fundraising for many traditional PE transactions abound. The safety valve of secondaries therefore becomes ever more appealing.

The LP advantages

For limited partners, there are two clear ways to take advantage of turning to secondaries; firstly, if there’s a need to re-up for the next investment cycle and reshape their portfolio, then offloading that asset at the right pricing floor becomes an attractive prospect. Secondly, for limited partners on the buy side looking to find quality businesses or assets at a sometimes heavily discounted price on the dollar, there are great deals to be had. Of course, there’s a tango that takes place between buyer and seller and there were times post-2020 where there was no great alignment on price or valuation of assets, hence the slowdown in-deal activity. As things stand in H2 2023, deal flows are good, discounts deep and buyers and sellers are making matches.

On the private equity front, the last 12 months has seen the expansion of secondaries funds aimed squarely at the middle market, with an ever more diverse sectoral selection of well-positioned companies becoming available. Of course, middle market companies have a lot more room to grow both operationally and in terms of scale, and often benefit hugely from PE firms’ capital injections and M&A expertise. The feeling among many investors is that there are bargains to be had in this space, and sellers seem more willing in this illiquid moment in time to adjust their valuations to get deals over the line.

GP-led secondaries have changed market dynamics

Looking at the history of secondaries, there is another key development it would be remiss not to highlight. If first period of the market was defined by limited partners led deals, then the second (let’s call it ‘post-Covid’) has been defined by the rise of GP-led transactions. Historically many GPs have often found themselves facing what you could term a ‘capital conundrum’ – on the one hand the need get a return on an asset as the clock ticks down on a fund, on the other often knowing they may be selling that asset before its value has been maximized.

Enter, stage left: GP-led secondaries

The asset – often held in a vintage fund nearing expiration – is sold into a continuation fund which enables GPs to keep control of their asset, attract investment from new limited partners, and pay out their original fund investors. Holding on to high quality assets for an extended period can help GP’s ensure they extract every bit of value created by their work and effort. It also offers the original investor optionality; an escape hatch if the investor is looking for distributions in order to re-invest or re-allocate their capital due to internal or external economic factors, or the opportunity to roll their capital into the continuation fund and share on the potential upside, often at more enticing economic terms than the original fund vehicle.

The outlook

With momentum building in the secondaries space and greater supply coming on-line, it’ll be fascinating to see where both fundraising and transaction volumes finish in 2023. It’s worth remembering that these are complex financial vehicles; having the right support for the operational process of administering a secondaries fund and the right tools in terms of data capture, delivery and monitoring is essential.

Looking at the horizon there are three factors that might have both short and long-term effects on Secondaries.

1. The potential impact in the US of the SEC’s Private Fund Reform Rule around Adviser-led secondaries and the requirement to obtain a fairness or valuation opinion from an independent party
2. The speed at which private equity players embrace AI and Automation to enhance the deal making decisions
3. To what extent the rise of NAV / Borrowing Base loans will eat into secondaries allocations

We’ll of course be opining on these factors in the months ahead, but, for now, in the ongoing race of financial performance, coming secondary seem to have its advantages.

Considering the transformational possibilities of artificial intelligence on fund operations —the right applications can do everything from reduce costs to help generate new revenue — it may come as a surprise that only 14% of fund executives surveyed by information service Private Funds CFO have implemented AI technology into their portfolio companies. Perhaps more startling is that more than half of respondents said they had no plans to adopt AI in the next year.

For Alter Domus Head of AI and Automation Davendra Patel, that looks like a missed opportunity, especially with areas such as risk management, due diligence, and performance tracking ripe for AI integration.

In a recent interview with Private Funds CFO, Patel said that in the current economic climate, AI is a pivotal tool for gaining a competitive advantage. That’s a view his own company has taken to heart: Alter Domus has created its own versions of ChatGPT and integrated generative AI to automate data from various sources, providing real-time information and insights to clients.

Patel, who has 30 years of experience in IT, acknowledges the potential security risks around AI, including the threat of shared information becoming leaked information. By developing proprietary tools, Alter Domus has optimized data safety. In addition, in-house experts continuously monitor the Alter Domus system for vulnerabilities and breaches.

“We focus on regular reviews, audits, and ethical considerations to ensure AI’s responsible and safe deployment,” Patel told Private Funds CFO.

“It’s essential to balance AI’s potential with practicality, focusing on both immediate gains and long-term benefits.”

Read the full article here.

What are some of the key considerations when identifying the right service operating model for your company?

Your operating model and managed services provider need to be able to accommodate your future growth plans. If you are considering moving into new jurisdictions, asset classes or strategies, they need to be able to flex accordingly to support that next step for your company. Crucially in today’s data-driven environment, you also want to think about your data and technology needs. Investors are demanding real-time access to information and transparency. Do you want to take on the cost and responsibility of building and maintaining the capability to provide that in-house? Many asset managers are engaged in M&A activity, which is a logical moment for a fundamental rethink of your operating model.

How is traditional outsourcing changing?

The need to access data is driving change – for the better in our view. We’re moving away from a commoditized and transactional type of model towards operationally integrated partnerships, where there’s transparency and access to data in real-time. We’re also seeing some consolidation and rationalization of partnerships. Where perhaps a manager might have had multiple fund administrator partnerships in the past, now they might have one or two deeply embedded partnerships that can cover all the jurisdictional and sector specialisms they need globally.

Co-sourcing is a relatively new concept. What is it and why might firms consider it?

Essentially, co-sourcing is an operating model where the manager maintains an in-house data and technology stack that their administrator has access to and can create and modify primary data elements. It’s a hybrid model between fully outsourced and fully insourced. The benefit it offers managers is that it allows total control and ownership of their data and real-time access to it, while tapping into the asset class and systems specialists, and talent acquisition capabilities of a fund administrator, all while reducing manager level overheads.

Beyond co-sourcing, in what circumstances might a full lift-out be the right solution for a company?

That partly depends on whether, as a manger, you have the scale and appetite to reinvest in your own technology and in-house operations or not. There are considerable advantages to partnering with a provider who constantly upgrades their technology platforms and can provide a long-term career path to valuable internal resources. There are also the economies of scale and best practices that a global administrator can offer, without being distracted by the challenges of maintaining a back office. We’ve seen great success for both clients and personnel as we’ve created a playbook to successfully assist with these types of full lift-out transitions.

With this evolution in mind, what should a company be looking for when choosing a service provider?

Ultimately a good administrator is focused on white-glove levels of service and forming a deep partnership with their clients, which will include customizable solutions and specific asset-class expertise that meets specific needs. An administrator should be viewed as a critical member of the team, who when leveraged correctly delivers significant value-add to portfolio, risk management, and investor teams. Critically, you need to have confidence that they are technologically innovative, as well as culturally a good fit for your organization.

This article was originally published in Preqin's Service Provider Report.