Data technology is increasingly crucial to improving efficiency and standardization in private market operations and assessing ESG risks
The recent market and economic turmoil, sparked by high inflation and rising interest rates, has forced private market managers and investors into a reckoning with their process efficiency. However, lack of streamlined data management processes and disparate data sources are major hindrances to growth.
Data management in the sphere of private equity and real assets has long been complex and piecemeal, as well as inconsistently applied, leaving market participants frequently unable to access vital information reliably or in a timely fashion.
Due to slow-paced changes in the economic landscape, investors have not addressed the concerns that a fragmented data management strategy brings. Additionally, the wide availability of attractive investment opportunities has resulted in better internal capacity for analyzing deals that have not given a sufficient advantage to make the necessary operational investment worthwhile.
However, in the last two years, markets have witnessed the highest inflation rates in decades. This has shrunk the pool of available deals from which investors can expect above-inflationary returns or yields. Meanwhile, interest rates have risen throughout developed markets to their highest levels since before the global financial crisis of 2008, increasing the cost of borrowing money and impacting institutions’ abilities to raise cash for leveraged private markets investments.
Higher interest rates also mean higher yields on traditional fixed-income and cash, putting further pressure on expected returns for private markets investments. Against this backdrop, it is not surprising that most respondents to the State Street 2023 Future of Private Markets Study described 'manual processes and outdated systems' for managing data as a 'considerable' waste of their time and resources. On the other hand, a similarly significant proportion said improving their data management and analysis capabilities gave their organization a 'competitive advantage'.
However, most respondents claimed they did not wish to reduce their private markets exposure, with more than two thirds (68%) saying they planned to continue with their existing allocation targets despite the difficult environment. They simply acknowledged that they need to improve their ability to assess opportunities and, in the case of managers, communicate essential information about investments to asset owners who want more frequent, verifiable, and standardized data on various aspects (such as return, risk, and ESG) of their private market investments.
The impact of technology on data operations
Survey respondents reported that a stronger focus on deal scrutiny and the data that helped them understand private markets holdings went hand-in-hand with investment in technology infrastructure. Together, they improved respondents' ability to view and analyze disparate types of data from various sources.
Our data shows significant technology investment is being directed toward private market operations across the spectrum of institutional investment organizations. More than three quarters (77%) said that at least 10% of their overall technology budget was being allocated to their private market operations. Additionally, more than half of respondents (52%) said they were spending more than 20% of their technology expenditure on private markets.
From an institutional investor’s perspective, most of these investments are centered around data collection, aggregation, and harmonization across disparate information sources, which are highly manual and complex. As the number of investment managers increases, the lack of standardization across different reports adds to the complexities.
Aligning disparate technology systems from across different areas of their organizations, both operationally and geographically, scored highly when respondents were asked to assign importance to various areas of their private market data management processes. However, the same options received low scores when respondents gave assessments of their competence in these areas.
Cloud technology was a priority direction for institutions’ technology investments, with 71% saying they were spending there, due to the simultaneous importance and underdevelopment of data systems’ interoperability, data lakes, and warehousing. Also popular was artificial intelligence (AI), which approximately a third (36%) said they were investing in. This is an increasingly important emerging technology for data management, as it is becoming essential to extracting and analyzing information from large cloud-based ‘lakes’ of unstructured, raw data.
ESG data in private markets
Another area of high importance but relatively low competence for institutions’ private markets data operations was assessing ESG characteristics of investments, particularly from a risk perspective. ESG data has long been a thorny issue in the investment industry, with a lack of reliable, directly comparable, and affordable sources of data, as well as consistent standards.
In private markets, these challenges are accentuated by two trends. Firstly, private companies and real assets are generally less transparent than their public counterparts, adding to the difficulty in finding reliable ESG information. In addition, the level of transparency across different asset classes differs due to the disparate nature of such investments.
Secondly, there is a lack of standardization when it comes to private markets. ESG data varies with each asset class, and generally, metrics are difficult to define in a consistent manner between asset types. Real estate exposure and the ESG metrics associated with that asset class are significantly different to a private equity portfolio company. The increase in regulatory focus on ESG will continue and lead to standardization across each asset type and the way in which metrics are defined and adopted.
A trend that’s not going away
Investment institutions’ new focus on making fundamental improvements to their private markets data operations is a product of external, macroeconomic headwinds. However, it is not likely to dissipate with those conditions. Over a quarter of respondents (26%) believed the current inflationary environment is likely to be short lived, or that the old market conditions will return as inflation subsides, compared to nearly half (47%). Forward thinking organizations, making the right amount of investments in sophisticated data management technology will benefit from the advantages conferred by better processes, enabling them to make informed investment decisions and help gain alpha even in a low-yield environment.
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State Street partners with institutional investors to provide comprehensive financial services, including investment management, investment research and trading, and investment servicing. It provides core custody, accounting and fund administration, and performance analytics for traditional and alternative assets as well as multi-asset class investments, and its global markets capabilities span electronic trading, securities lending, and collateral and liquidity management, along with specialized investment research and market insights.