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.