When one industrial revolution yields to the next – and the next after that – the prime mover is always a new technology that exponentially boosts human capacity and output. Rapid replacement of analog activity by fully digitized systems is our productivity revolution of the moment. It’s all about harnessing data, creating new connectivities and churning out sophisticated analytical knowledge. What it promises is a seismic upgrade to value chains throughout the world economy.
Serious investors, whether they favor conventional or alternative assets, are experiencing a twofold effect of digitalization. First, they must recognize or even predict how cutting-edge businesses will exploit new digital platforms and tools. Second, they must comprehend how their investment sector itself will be disrupted.
Amin Rajan, Chief Executive of CREATE-Research, a U.K. consultancy to governments and global companies, agrees with those who have called digitalization the new “heartland technology.” Rajan recently quoted a report saying that 90 percent of all the data in existence today has been created in the past seven years. Observing the scale and sweep of digitalization, he sees in it “the potential to penetrate almost every area of the value chain in alternative investing.”
Challenges for investors
Against this backdrop of change, alternative-asset investors are compelled to assess a host of economic dynamics and technology stories all at once. For example, low-cost labor centers in Asia will continue to influence production strategies, but there is peril in being late to shift to robot-based factories staffed by up-skilled workers. A $30 trillion intergenerational wealth transfer occurring in North America has major implications for financial markets and society at large, and yet some experts see the 2020s and ’30s as an era of widespread impoverishment in old age. Chilling projections of the oil and gas production needed to serve a burgeoning world population collide with counter-predictions of how swift and successful our shift to renewable energy will be.
And all of this is unfolding in a macroeconomic context that is no longer spoken of as peculiar, because it has prevailed for so long. “Valuations across the asset classes are artificially inflated by central-bank policy,” says Anthony Cowell, Head of Alternative Investments for KPMG in the Cayman Islands. “The private equity industry in particular is still holding a lot of dry powder – which makes this an interesting time.” Impressing Cowell, in particular, are private equity and real assets, where he sees new energy and newly formed investment consortiums controlling deep pools of capital.
Rajan acknowledges that the term “Big Data” is hardly new. “What’s new is its volume, variety and velocity,” he asserts, citing a qualitative shift “from Big Data to smart data,” which stems in large part from the infusion of machine learning into the processing of today’s extremely large datasets.
“In the last decade,” says Rajan, “we had descriptive analytics – telling us what happened – and also diagnostic analytics – telling us why it happened. Now we’ve moved into the realm of predictive analytics – telling us what will happen – plus prescriptive diagnostics, which explains what will make it happen.” Traditional investment processes and strategies across the realm of alternative-asset classes will, in his view, “take on a powerful new dimension,” thanks to these enhancements. His only caveat is that “some strategies within alternative investing are more amenable to digitalization than others.”
Cowell agrees that machine learning, a.k.a. deep learning, will create a condition “where algorithms see things before they happen.” In terms of how this affects the current structure of alternative-investment management, he foresees a barbell-type effect emerging, in which the quantitative approach gains market presence, middle-path managers who include closet indexing in their strategy completely disappear and smaller specialists trade on their special investing expertise and contacts. “AI will have a big role,” says Cowell, “but smaller boutiques will pick and choose their particular spaces and pursue niche-type strategies that should prove effective.”
Solving for greater productivity
When it comes to digitalization’s impact on productivity, not all alternative-asset classes are created equal. Globally, productivity in the construction end of real estate, for example, has dipped over recent decades, even as it has spiked upward in manufacturing and other sectors. This fact has not gone unnoticed by Rick Aspin, of Dart Enterprises Contracting Co.
“From the outside looking in, the construction industry appears very profitable, but in terms of productivity, we’ve been going backward,” says Aspin, whose title is BIM Manager – a reference to the term “building information modeling,” a catch-all for digitalization of the architecture, engineering and construction (AEC) and facilities management (FM) industries.
In the Cayman Islands, where Dart’s design-and-build division is dominant, a successful experiment to reinvent construction is heading into its third year. To understand the need for such an overhaul, one needs to realize that the shift from hand-drafted blueprints to computer-aided design (CAD) triggered a generational divide within the industry. The on-screen work of younger designers was foreign to experienced professionals, and the traditional approach to mentoring was disrupted as a result. At the same time, duplication of documentation was simple, but the industry was ill-prepared in managing the abundance of new data.
“Drawings by hand were never perfect,” says Aspin, “but at least blueprints didn’t proliferate in dissimilar iterations at a rapid rate, compounding problems caused by an urge to start digging. Culturally, this industry has become increasingly schedule-focused.” It’s extremely rare for mature technologies such as CAD to actually create inefficiencies, but it can happen, and Dart has devised solutions. Its technology – along with a cultural shift across its entire staff and workforce – have the division “poised for leaps and bounds forward,” according to Aspin.
“It’s about having what we call one version of the truth, in the sense of fully controlled data covering design, equipment specs, timelines – everything,” he says. Eventually such digitalization and self-imposed discipline will dramatically improve efficiency in building operations and maintenance, as well, and will include a functional Internet of Things system to monitor equipment performance against expected efficiency and useful life.
As the experts have attested, alternative-investment assets don’t feel the effect of this all-digital reality evenly. Furthermore, a geographical skew needs to be appreciated by those who want to pursue alternative alpha with a reliable compass. Rajan, who takes particular interest in the “where” factor, sums things up this way: “The regions to watch are sub-Saharan Africa for infrastructure, Europe for real estate, the U.S. for alternative credit and hedge funds and, finally, Asia for private equity.”
It’s a point in time when measuring data in gigabytes is passé, and odd-sounding units like the petabyte, yottabyte and even the brontobyte are set to become the norm. Alternative investing, asset class by asset class, is peering toward that horizon with plenty to figure out and much to be gained.
Anthony Cowell, Amin Rajan, and Rick Aspin are scheduled to speak at the 2018 Cayman Alternative Investment Summit (CAIS), scheduled for Feb. 8-9, 2018 in the Cayman Islands. For more information, please visit www.caymansummit.com.