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.

How would you describe GP-led dealflow right now?

Tim Toska: Conversations with our clients around GP-led secondaries are becoming increasingly common. Sponsors are identifying high-performing companies where significant value-creation potential remains and are putting them in continuation vehicles. These deals have become a valid fourth option when it comes to exiting businesses.

Brian Mooney: Almost every major private equity firm has completed at least one continuation fund and many have completed several. We observe that firms that have yet to do so are working on one right now or considering their first. However, there is a massive supply/demand imbalance. While the demand side (buyside capital) is growing, it is not keeping pace with supply, particularly given that so many LPs are suffering from the denominator effect. That is impacting fundraising in all asset classes including secondaries.

As a result, GP-led deal volume is down on last year, but those transactions that are taking place involve the highest quality sponsors and the highest quality assets. I would also add that there has been a marked shift towards the mid-market. Very large single-asset or concentrated portfolio deals, meanwhile, are proving more challenging

What impact are those supply/demand dynamics having on pricing?

BM: Only 25 percent of all GP-led deals were priced at a discount to NAV in the first half of 2021. By the first half of 2022, that had increased to 50 percent, and I think that is still true today. We are also seeing more transactions with some kind of structuring involved in the purchase price. It could be a simple deferral or in some cases a portion of the purchase price is based on a contingency such as hitting a certain level of EBITDA at a given date.

How should sponsors prepare their assets and processes to maximize the chance of a GP-led deal completing?

TT: Transparency is paramount, and I think the GP-led secondaries market has benefited from enhanced transparency more broadly in the wake of the pandemic. Historically, there was criticism levelled against the asset class with regards to a lack of readily available information and stale information.

During the pandemic investors began to demand frequent data points and communication around specific companies, which forced managers to put the necessary infrastructure in place to deliver on that. That means that when a GP raises the prospect of a continuation vehicle with a particular asset today, the LP base is already well versed on how that company is faring and why a continuation vehicle might make sense.

BM: Sponsors today are communicating with their investors early and are focused on transparency, both with buyers and the existing LP base. In terms of preparing companies, it is all about finding the ideal candidate and having the right motivations.

What are secondaries buyers looking for in a GP-led deal in terms of alignment?

BM: At an absolute minimum, a GP needs to roll at least half of its capital. For us, as a buyer, the GP must be a net buyer or else the transaction is of no interest to us. We tend to become really interested, however, if the GP is proposing to roll all its capital, meaning the original investment plus carry crystalised through the sale to the continuation vehicle. A GP-led transaction becomes even more interesting if the GP wants to write an additional cheque, which could mean a commitment from its new flagship fund.

Meanwhile, economic terms tend to be more favorable, with lower management fees and tiered carry, which serves to further enhance alignment.

What role can technology and data analytics play in supporting a GP-led process?

TT: With a GP-led process, as with so many areas of private equity, it is vital for sponsors to have a single source of truth in-house. Get your data systems in place and then you can overlay that with market insight to help identify the perfect candidate for a continuation vehicle. Investors are also relying on data analytics to evaluate manager performance. But I would add that data analytics is fundamentally about taking the robot out of the person. It takes away all the laborious legwork and enables teams to bring a new and more valuable set of skills to the table.

BM: Underwriting a continuation vehicle is a very intensive process. You need to underwrite the sector and the company, but you also need to underwrite the sponsor. You need to evaluate how that sponsor has added value to that business and whether that is consistent with the strategy being proposed for the continuation fund. All of that involves pattern recognition and, if you have the data and analytical tools to gain that insight, you can better assess the risk/return profile of the deal.

What other areas of private equity do you see as ripe for tech disruption in the future?

TT: I see the real value of technology as supporting due diligence at the front end of a transaction. I also believe that automation can help streamline processes, making data requests that might previously have taken days almost instantaneous. Meanwhile, the more standardised that data becomes, the more easily it can be integrated into investors’ systems as well.

BM: I think data analytics will play an increasingly important role in LP secondaries, where you are often building portfolios with hundreds of fund interests and thousands of underlying companies. Technology can help make that market much more efficient and support our ability, as buyers, to submit offers more quickly, while also informing our portfolio construction around underlying risk and return drivers.

I agree with Tim that technology in this asset class is about taking the robot out of the person. This is still a people business. As investors, we are betting on the teams that we believe are the smartest and best at what they do.

This article was originally published in PEI’s US Mid-Market Report.

What do you think are the factors driving the incredible growth in distressed debt and special opportunity funds?

First, there’s the legacy effects of a long-term zero interest rate environment, and the proliferation of dividend distributions from a lot of LBOs, especially from the sponsor finance community, or private credit funds. They were done when rates were low – one floor or two for reference rates – and now it’s ticking up to the five range.

And with these legacy spreads and the current reference rates, some of these companies can’t afford that debt service as part of their operating model. That’s starting to trigger a lot of the EBITDA covenants within their underlying credit and lending agreements.

So we’ve seen a lot of our traditional private credit lenders and opportunistic managers launching special situations and credit opportunity funds, where they can step in, restructure the debt, and maybe put it on non-accrual or non-cash pay for a period of time to work these deals out. There was a bump in these funds being formed at the beginning of covid, with the assumption the pandemic would create a boom in distressed situations for the then pending economic distress.

However, due to all the government stimulus, that boom was delayed. But with the prolonged increase in rates, even with the continued economic performance, a lot of these managers are expecting that boom to commence. There are also situations like the collapse of Silicon Valley Bank that suggests there will be interesting portfolios coming to market, priced to be offloaded quickly and able to be worked out at significant returns to investors.

Do you think that same environment is fueling a rise in asset-based lending funds?

Traditional asset-based lending is typically lending where there’s a lag time between when corporate borrowers need to finance their commercial operations and bridge the period of time that their customers are paying them for the product that’s been delivered.

Up until recently, that’s been the world of a money center bank, or a super-regional money center bank that have these facilities where they will make those loans, monitor those loans and pledged collateral, and keep that relationship with a borrower. But given the ultra-sensitivity of those super-regional bank market events, those are really good loans to shed because they have high market value, without the bank to reserve against them.

So we’ve seen a number of those portfolios come to market where it’s private capital that will take on those ABL facilities on behalf of the borrowers at a pretty good rate from the original bank lender.

And then there’s the role of the traditional investment bank on providing portfolio leverage, which we now see large insurers and actual funds coming in to replace them, despite all the compliance issues and strict rules around what’s applicable, what’s admissible, and substitution rights if a particular asset goes wrong. This is now becoming the realm of large insurers, since they have a more permanent capital base, one that isn’t based on deposits.

We’ve had a few clients entering into lending or refinancing arrangements, and they really liked the term loan and the borrower. The borrower then brings up the fact that they also have this ABL and would like to have the same provider for both.

So the manager decided to meet that market need, and as a result, we ended up exploring what we could do to service them, and licensed a product dedicated to the ABL space that provides transparency to the lender, the borrower and us though the operating infrastructure.

For managers looking to launch their first credit fund to take advantage of this environment, how should they think about the operational infrastructure to administer it?

When I speak with PE managers that are used to underwriting and investing in a portfolio company and valuing their portfolio once every quarter, they’re in for a very different level of activity in the credit space. The same underwriting process and the ongoing valuations occur, but additionally the bank debt pays at a minimum quarterly, and the rate resets typically quarterly. There are amortisation payments. Loans are typically originating below par. So they’ve got non-cash income that they need to recognise.

These deals get amended constantly, so there could be different compliance rules under the credit agreements. Furthermore, the maturities get extended, the size of the deal could move up and down, and all this requires a great deal of monitoring of the underlying borrower. And they need a system that will address and support all those things.

They have to decide who will be the administrative agent on the credit, whether it’s done internally, or outsourced completely.

Then there’s SEC oversight around the custody of investor assets. How are they going to build an infrastructure where they’re not co-mingling investor monies across multiple funds or different borrowers and everything else required to withstand the scrutiny of the SEC? And that’s just on the legal and operational side of things.

As a result, our clients invest a lot of resources on attorneys, compliance experts and our services because we have the appropriate systems for the agent components, the loan administration, which is tracking and ticking and tying all the cashflows, positions, rate resets, amortisation schedules, and then ultimately the fund accounting and investor reporting. Because a direct result of this growth in private credit is there is a dearth of people that know how to do credit accounting because it is very different than PE, or fund-of-funds accounting.

This ends up producing a massive amount of data to monitor and manage. The front office wants credit monitoring. The middle office needs to monitor the compliance with the credit agreements. And then the back office needs the data to produce the reports and everything else. There are big ticket systems available that cost millions to implement or off-the-shelf systems that support various functions for credit managers.

There are much lower cost solutions for data warehouses where they can build report writing software on top of the warehouse – these become a kind of integral hub for the spokes that go out to address reporting requirements. And then there are other inexpensive add-ons that can offer portfolio view technology as well.

Most clients want that data in-house, but it’s a daunting task to build internally. This is why we’re confident that outsourcing will continue to offer a compelling value proposition for the GPs looking to make the most of this particular moment in the credit markets.

This article was originally published in PDI's US Report.

The US Broadly Syndicated Loan market (“BSL”) is a proven asset class with a track record of over 30 years (from the earliest leverage loan ‘prime rate’ mutual funds). CLOs are significant investors in this $1,5tn+ market. Other investors include regulated mutual funds and ETFs, and private account investors.

While BSLs offer high yields and could be attractive under an environment of increasing interest rates, they also come with several risk factors that can affect their pricing and complicate the management of a portfolio of BSLs.

Credit risk, interest rate risk, market risk, and prepayment risk are several key factors that BSL managers consider. In this article, we’ll explore the drivers of leveraged corporate loan prepayments and how BSL portfolio managers (whether it is a CLO, ETF, open end mutual fund, or private account) can potentially improve their performance and better manage investor expectations by using more sophisticated quantitative models.

Specifically, we’ll examine some of the key factors that would drive critical quantitative models to estimate prepayment risk and how these models can help BSL managers make more informed decisions to improve investment performance. 

Why prepayments matter for investors

The benefits of accurately anticipated prepayments in a BSL portfolio could be significant for investors in terms of better performance, lowers costs and more efficient portfolio management. A few examples of how a market participant could benefit from a model driven approach to better anticipate and manage prepayment risk include:

• Managing prepayment cashflows can allow BSL managers to better prepare for their next investment decisions (e.g., complying with reinvestment criteria, avoiding incurring transactions costs to meet a purchase commitment) or to better manage investor redemptions – as in the case of open-end mutual funds.
• Any time a prepayment occurs, the loan’s correspond rating bucket will make up a lower portion of the total portfolio (this is especially relevant for CLOs where ratings criteria are critical drivers for ensuring compliance with trading rules). This balance shift can have downstream consequences on whether the portfolio manager can meet the ratings portfolio criteria (i.e., WARF, Caa/CCC limit). Being able to anticipate the distribution of prepayments by rating buckets can allow a manager to better plan for these risks and enhance their ability to preserve the credit risk profile of a fund/portfolio.
• Prepayment modeling can complement the underlying investor’s expectations of returns and cash flows. For example, in static private accounts or for vehicles that are no longer in their reinvestment period, the portfolio prepayments will have a significant impact on the underlying cash flows distributed to investors.
• Proper management and projections of prepayments will assist managers to more efficiently redeploy those funds to minimize negative carry. Negative carry could have a significant impact on a BSL portfolio’s returns.
• For funds that are part of a larger fund (some CLOs and SPVs for example are consolidated into a larger fund) can incorporate prepayment management into the asset-liability management of a parent fund.
• As BSL investors increasingly demand sophisticated and quantitative approaches before investing in a particular fund, a manager that utilizes cutting-edge methods increases their opportunity of raising funds and meeting investors’ expectations – above and beyond direct links to better performance, such as market best practices, surveillance, forecasting, etc.

Factors that can influence loan prepayments

BSL prepayments are driven by a host of factors. Our analysis shows that the most pertinent fall into three categories – (i) Age of Loan, (ii) Loan Spreads and Prices, and (iii) Loan’s Recent Prepayment Activity.

Age of Loan

The first significant driver is the number of months-on-book. Recently originated loans are highly unlikely to prepay. However, as prepayments continue to increase linearly with time, there are some nuances to consider.

The linear trajectory of prepayments may have a different slope depending on the loan’s term structure, with shorter-term loans having steeper slopes. Additionally, towards the end of a loan’s term structure, there is a substantial increase in prepayment as loans get closer to their final repayment.

Loan Spreads and Prices

Loan Spreads – at the loan level

The loan’s spread is another factor worth discussing. The loan’s spread can influence prepayments in either direction. A higher spread can indicate the credit worthiness of a borrower who must allocate more cash to consider a prepayment, making doing so more challenging. However, higher spreads can also increase the borrower’s incentive to prepay, as the potential to reduce interest payments is higher.

This can especially be the case where a borrower’s credit profile has improved. Our findings suggest that higher spreads have a positive relationship with prepayment, indicating that the benefits of prepayment outweigh the costs of higher rates.

Market Loan Spread

However, loan spreads don’t affect the loan in isolation. The average spread of other loans on the market is important. The lower the average market spread, the higher the current loan’s propensity to prepay holding all else equal. This relationship suggests that when spreads are lower elsewhere, borrowers attempt to prepay either to refinance or partially take advantage of lower spreads elsewhere.

We found that when the broader market’s spread is included in a model, the current loan’s spread exhibits a stronger effect. This change suggests that the difference between the two spreads plays a key role in driving prepayments. However, this relationship becomes complicated once the next factor – Price – is introduced into the model.

Loan Price – Current

A loan’s current price is a strong predictor of prepayment probability. More specifically, a loan has a marked increase in prepayment rates if its price is between 99 and 100.5, with the peak occurring at 100. A very large proportion of all prepayments occur when the price of the loan is within that range.

Furthermore, certain factors including the loan’s spread and the market spread become irrelevant once price is controlled for – this is not surprising since the specific loan facility spread and market spreads are generally considered in the price. Thus, even though spreads likely play an important causal role in driving prepayments, the market is accounting for loan spreads and market spread when pricing loans.

Thus, when trying to predict prepayments, the loan’s price carries a good degree of information available in other loan characteristics and will generally dominate many other, though not all, explanatory variables.

Loan Price History

Another factor that matters for a loan’s prepayment activity is the loan’s price history. If a loan is priced at 100 because it was recently issued, one wouldn’t expect that loan to prepay. However, once the loan has been on the books for some time and experienced price fluctuations, then its higher price becomes more meaningful.

Recent Loan Repayment Activity

A loan’s recent behavior can affect the loan’s propensity to prepay in one of two ways. A borrower could have just made a substantial prepayment and consequently have little capacity to prepay for some time. Or they could stagger their prepayments across multiple periods. We found the latter to happen more often. Thus a loan’s most recent period’s prepayment indicates a higher likelihood to prepay again.

A few words about private debt prepayments 

In this paper we provide some insight into prepayment modeling for BSLs, and we find that a very powerful indicator of prepayments in the price of the BSL. For pure private lending, however, market prices are not readily available. In such cases more modeling around fundamental prepayment drivers – such as economic variables, broad market variable or even underlying company financial statements – would need to be explored and analyzed.

Alter Domus has performed extensive fundamental prepayment analysis for private loan portfolios. Our Alter Domus Risk Modeler provides the platform to perform and deliver such analytics. Risk Modeler is also applicable to the broader BSL marketplace for advanced analytics, including prepayment.

Conclusion

The large, established and growing BSL market presents both opportunities and challenges for underlying investors and their respective portfolio managers. Prepayment risk is a critical factor to consider, as it can impact a BSL’s portfolio performance. By employing a model-driven approach to managing prepayment risk, BSL managers can better plan their investment decisions, maintain the risk profile of a fund, manage investor cash flows (including redemptions) and better cater to investor expectations.

Key factors that influence prepayment activity for BSLs include months-on-book, loan and market spreads, current and historical loan prices, and recent prepayment behavior. By understanding these factors and their relationship with prepayment probabilities, BSL managers can make more informed decisions to optimize their portfolios. For private loan investors, modeling and managing prepayment risk may be a little more challenging given the lack of observable market prices. However, more fundamental techniques around prepayments is a field where Alter Domus has significant expertise and capabilities through our alter Domus Risk Modeler platform.

Embracing advanced quantitative models and keeping abreast of factors affecting loan pricing and prepayment risk will ensure that BSL managers can successfully navigate the complexities of the market, ultimately benefiting both the portfolios they manage and their investors. While the insights above based on aggregated market data can provide value to Alter Domus’ clients, a deep dive into an individual portfolio can significantly improve a manager’s ability to better manage prepayment risk. 

What macroeconomic drivers do you see influencing the infrastructure debt market share?

The COVID-19 pandemic and energy crisis both brought a lot of attention to the infrastructure industry, pushing the ESG agenda and increased investments into renewables. Currently, investors seem to be rebalancing their portfolios away from core strategies to avoid the adverse impact of higher interest rates, and toward higher-yield core-plus strategies. In this context, infrastructure debt is gaining popularity, notably because of its highly attractive risk-adjusted returns.

What opportunities and challenges does infrastructure debt bring LPs in more stringent markets?

Competition is certainly increasing, with both traditional equity and established debt investors coming into the space. There have been a lot of new players drawn in by the opportunities that infrastructure debt offers. This increasing competition also extends to competition for the right assets.

It is likely the space will see more capital concentration in the market as larger firms pick up the bigger projects. On the other end, many new players are coming to market with smaller funds and pushing for projects in emerging sectors, particularly renewables. In the next five years, we will likely see even more smaller participants entering the industry with stronger specialization in these verticals, which can be good news for investors. Diversification is always attractive – not everyone necessarily wants to put all their eggs in the “larger firms” basket.

What should LPs new to infrastructure debt know about entering a niche market?

One needs to keep in mind that niche markets like infrastructure debt often have specific needs and characteristics. Infrastructure and debt managers will certainly be knowledgeable, but combining the two components may present a learning curve for some. Infrastructure debt funds can prompt more involvement from the administrative side, in particular around loan servicing or portfolio monitoring.

Efficiently managing a loan portfolio and its revenue base requires a solid understanding of debt, but equally as important is the ability to gather, aggregate and analyze data related to the loan portfolio, the borrowers and agreed covenants. This is what allows managers to gain insights into the portfolio’s performance, flag any credit risks as early on as possible, and simply take timely and informed portfolio management decisions.

Both managers and LPs need to ensure their back and middle offices adapt to fit the needs of a multilateral strategy, and ensure that their tools, systems, processes, and their team’s skill sets are in place, either in-house or through the use of external resources.

How can infrastructure debt evolve as the US puts more energy into national infrastructure projects?

Infrastructure has always been a way for governments to spend themselves out of a crisis, create jobs and get the economy back on track. Over the past two years, the US legislator voted on two major Bills which have contributed to raising the US market’s appeal among global infrastructure investors, specifically to accelerate the energy transition. Governments will partner with the private sector to execute on these projects, including with private equity types of investors.

Of concern, however, are both the availability and cost of debt, and the fact that many banks seem reluctant to finance anything riskier than core strategies. Consequently, many managers are looking at non-bank lenders and debt funds to finance new projects or to refinance existing ones. This opens up a lot of opportunities in this niche asset class.

This article was originally published in Preqin’s Infrastructure Quarterly Update.

We’ve heard loud and clear from our customers that their ability to continue to compete and succeed in the alternatives marketplace is increasingly dependent upon their capability to integrate advanced technologies into their data management and decision-making processes. This was the driving factor behind our acquisition of Solvas from Deloitte in May of this year.

Empowering insight and client growth

Having Solvas’ best-in-class product suite as part of our operating model enables us to support and accelerate the growth of our partners like never before.

Backed by experienced, specialist teams, these scalable, flexible software solutions provide clients with a clearer, holistic view of their portfolios, helping them to get ahead of regulatory change and to better manage risk for a more resilient future.

Please do not hesitate to contact us at [email protected]. if you have questions or would like to learn more about how our data and analytics services can help support your business.

We are proud to announce that Alter Domus has won the award for Best Debt/Loan Administrator at Private Equity Wire’s US Credit Awards 2023. Held in New York City on June 22nd, the award ceremony recognizes fund performance and service provider excellence across credit funds in the United States.

Alter Domus was selected as the winner of the “Best Debt/Loan Administrator” based on a widespread survey of more than 100 credit fund managers.

We’re thrilled to have been recognized by our credit clients for outstanding service. This is one of many recent awards the US private debt team has won, and we’re incredibly proud of the added value we’re providing our clients day in and day out. A big thank you to everyone at Alter Domus North America for helping to make this achievement possible!

Tom Gandolfo, Head of Sales & Relationship Management North America

What facilities of data collection do you believe will become prevalent in a more stringent market?

While navigating the extreme volatility in the current market, data collection facilities will be geared toward traversing three key mega trends. The first is the emerging convergent industry model. The financial, administrative, and advisory sectors are morphing together to create a new business model that will require a more integration-based approach to data collection.

Secondly, sovereign wealth funds (SWFs) are looking to shift more in private equity investment. This transition will demand greater due diligence around compliance and guidelines.

Finally, ESG conditions are becoming an important facet of SWF investing. As such, many firms have set out to eliminate their carbon emissions by 2050. All these trends require an evolved level of data analysis that will set the course for data collection in the future.

How can clients utilize and incorporate data to navigate market turbulence, particularly vehicles with lower-risk tolerances like SWFs?

Future data collection will need to introduce a new tool kit, ensuring data is not only collected, but organized in a way that can be assessed efficiently and offers investment insights. New technologies will play a big part, helping to deliver a deeper form of data retention. The industry demands data-driver models that incorporate traditional and non-traditional research sources. For example, social media can now serve as an insightful resource. Moreover, the industry must look for ways to blend machine learning, such as AI, and human efforts. These practices work best when automation is performed with AI to optimize data gathering, and then humans weigh in on analysis.

Can sustainability extend to data collection? If so, how do these changes vary for funds with more robust regulations?

Sustainability initiatives are challenging for more regulated clients, such as SWFs. Now, information linking ESG resources and financial performance lacks consistency and transparency. We see many initiatives around regulations to establish more transparency and even create a potential benchmark.

One initiative is ESG data convergence, which would demand both GPs and LPs agree to report and collect the same ESG metrics, from board diversity to carbon emissions. Ultimately, it is a matter of defining the data points that can be collected and monitored in the same way, then normalizing them. It isn’t easy, but there is a lot of attention around the topic.

What impact do you envision this form of sustainability practice having on the private sector as a whole, or the data collection industry specifically?

Data collection around ESG will influence other sectors by providing comparable information to the private sector and establishing a coherent marketing approach. These sustainability practices will also need to be specific to the client. The same data points won’t be relevant across all strategies in the private sector. It will be about identifying which data points are relevant to the specific underlying assets.

This article was originally published in Preqin’s Sovereign Wealth Funds Report.