Administering an investment portfolio that contains alternative assets – including hedge funds, private equity and real estate, to name just a few – has long been a notorious source of frustration and difficulty for asset owners and asset service providers. That’s because the whole arena of alternative assets feels archaically stuck in the past. There’s little standardization in alternative markets and portfolio managers use a variety of reporting formats. A hodge-podge approach to data and over reliance on manual processes in this area of investments has hindered and perplexed investors for decades.
You may know this firsthand if you’ve attempted to get a detailed, accurate view of alternative investments in a portfolio. The resulting scavenger hunt typically involves chasing down data across many different files, trading countless emails, combing through byzantine legalese and – most infuriating for many – ending up with ballpark estimations relying on outdated information from murky inputs to show for all your trouble. It’s no wonder why asset owners and their service providers typically lack a clear view of the exposure, liquidity and valuation of alternative investments in their portfolios.
Addressing the four pain points of alternative assets
Fortunately, emerging applications using artificial intelligence, blockchain, cloud computing innovations and other technologies are finally addressing these antiquated problems – transforming the world of alternative-asset servicing with streamlined processes for both asset owners and portfolio managers. Northern Trust is leading this effort to bring speed, clarity and control to the chaos and tedium that has bedeviled the administration of alternative assets for much too long.
“We’ve embarked upon a multi-year initiative to transform the way we process alternative assets through the use of digitization,” says Melanie Pickett, Head of Northern Trust Front Office Solutions. To be specific, the company’s alternative asset digitization initiativeis focusing on creating solutions to solve four classic problems that cause particular consternation:
Pain point #1: Procuring thousands of documents
Investors often receive communications from a hundred or more general partners on a monthly or quarterly basis – typically in the form of emails instructing them to go to various portals and find their statements. For every single one, “an investor has to open the email, go to the portal, find and enter the password, pull the document into their system…the act is burdensome before they can even start to process the information that’s in the document,” says Pickett.
Northern Trust automates document procurement using robotics and Python scripts that trawl the investor portals hourly. “We’re often able to grab the document before the manager has even been able to send the email to the client,” says Pickett. This means investors perpetually have every document as soon as it’s available without devoting any effort or attention to this never-ending need.
Pain point #2: Tagging thousands of documents
Of course, receiving the document is only one step; most investors need to tag it appropriately so it can be entered into their document management system (to be searchable for audits and other routine uses). As both documents and DMS platforms vary wildly, building the powerful, AI-infused application that can automate tagging effectively has been largely out of reach for businesses that need this solution. “We have developed a set of algorithms and are currently alpha testing with an endowment client to help them automatically tag documents as they come in the door,” says Pickett.
Pain point #3: Capturing operational data from thousands of documents
After tagging, investors further need to capture specific information from those thousands of statements and documents and enter it into the correct fields and areas of their DMS. In alignment with the drudgery described in the prior two pain points, this operational data capture process is often done manually (with most previous automation-focused products, again, thwarted by the massive variety in the received documents and idiosyncratic differences among DMS platforms in use).
Northern Trust has developed powerful solutions to automate this tedious chore with accuracy and precision, too. “Key information like net asset values, the client balances, the transaction details and so forth are not in the same place on every investment manager statement – but they’re in the same place every time for the same fund,” says Pickett. “We’ve put into production a number of natural language processing routines that help us pull out that information on an automated basis for our clients.” She adds that the technology will continue to improve over time, as it processes more than 100,000 documents that Northern Trust receives on behalf of their clients each month.
Pain point #4: Capturing detailed investment data from thousands of documents
In addition to capturing surface-level investment data like NAVs, transactions and the like, many alternative asset investors and service providers want to integrate more detailed information from fund performance reports and other sources into their data systems. “A performance report from a private equity fund may describe all the underlying holdings, their revenue, and even their performance at a deal level – and more of our clients are looking to capture information at that portfolio company level,” says Pickett. Northern Trust is looking to automate this fourth vital “pain point” need – investment data capture – through a collaboration.
Tapping blockchain and cloud innovations
While attacking the big four pain points above are already proving transformative to investors and managers with significant alternative-asset holdings, additional evolving solutions using blockchain and advancing cloud technology are also continually increasing their serenity, control and productivity in managing their portfolios.
For example, in 2017, Northern Trust pioneered the use of blockchain with an automated set of ledgers to create a new level of flexibility and versatility in managing fund data. By applying blockchain to the entire operational workflow of a fund, every transaction and occurrence – from capital calls to audits to exchanges between GPs and LPs – is automatically captured and encrypted.
This capability is a game-changer when responding to audits, requests for regulatory information, and other time-consuming events. “In fact, the blockchain technology eliminates the need for a year-end audit on the fund, because the fund is being audited with every transaction and every update,” says Pickett. To allow a greater number of private equity funds use their automated ledger solution, Northern Trust handed off the technology to Broadridge Financial Solutions in 2019.
As for advancing cloud technology, it’s greatly increasing both the scale and speed of delivering services to alternative asset investors and managers. “Cloud providers have, by and large, really democratized that toolset around machine learning and data science,” says Pickett. “In building the algorithms that we’re working with and having the scale and computing power to actually process hundreds of thousands of documents through these algorithms, it would just not be feasible if you were trying to build everything from scratch and do it in your own data center.”
By giving businesses immediate access to advanced technology platforms and cutting-edge applications, cloud services are providing even smaller firms with incredible potential in terms of flexibility and scale – allowing much faster and more cost-effective testing, iteration, improvement and deployment of digital finance products than was possible just a few years ago.
Lacking these capabilities, many fintech providers still update their clients’ systems on a quarterly or annual update cycle – which is far too infrequent. In contrast, the cloud-based platform within Northern Trust’s Front Office Solutions will update client systems 20 times a month or more, says Pickett. “That de-risks the releases for our clients – because we’re not releasing huge chunks of code and hoping nothing goes wrong – and it also makes us able to iterate very quickly because we’re not waiting until the next quarter or next year to add new features or make other changes.”
As a result, Northern Trust Front Office Solutions has plummeted its cycle time – or the time it takes a digital feature to go from imagination into production – down to 10 to 15 days, which is a fraction required by many other fintech companies. “When a client requests, say, a new calculation to be built into their dashboard, we can often deliver that in less than 12 days. That’s a tremendous value for us and our clients.”
Investors need stronger toolsets – and greater leverage
Many of the difficulties surrounding the management of alternative asset portfolios stem from a persistent systemic issue that gets too little attention, Pickett says. “A core root of the problem is that investors don’t always have the leverage to demand the transparency they need," she explains. “There’s tremendous inequity in the information asymmetry between GPs and LPs. So only the world’s largest investors are able to really get full transparency into their portfolios.”
GPs often don’t satisfy all the LPs’ reporting needs, she continues. This creates a frustrating reality for investors. “It adds insult to injury that the LPs are the ones who are actually paying for the fund’s accounting and operations,” Pickett says. “They’re paying for the disparate information and untimely information to be created and sent to them, and then they’re paying again to normalize it, aggregate it and figure out how to ingest it across what are often hundreds of investment managers. So, to not be able to get what they need and to be the ones paying for it is doubly painful.”
A systemic fix to this issue won’t be coming soon. Occasional industry-wide efforts to lessen its impact have yielded few results; for example, consortiums have tried to institute standard reporting rules, but few investment managers tend to adopt the standards.
“Right now, the best thing we can do as service providers is to provide investors with a toolkit to ease the pain and burden of disparate and untimely reporting,” says Pickett. “The good news is that toolkit includes a lot of emerging technologies that are going to become increasingly more helpful, and that toolkit is evolving all the time.”
Pickett is also hopeful the financial services industry will soon begin to consolidate many of these vital automation functions and integrate them in platforms and products that make it extremely easy for investors to access and use. “We’re seeing lots of M&A activity where software firms and data providers are merging,” she says, noting such mergers were rare just five years ago so this likely is an encouraging sign that such consolidation is already underway.
Getting advanced intel before making the investment decision
While Northern Trust is breaking new ground in the use of AI, robotics, natural language processing, data science processes, blockchain, cloud deployment and other emerging or advanced technologies to create new automation solutions, saving hundreds of hours of work and untold expenses in fund or operational management is only part of their mission.
“We’re also focusing on providing benefit to asset managers and owners before their investment decision is made with a new solution set we call Investment Data Science,” says Pickett, noting this is a key differentiation point for the company’s services. “How can you make sure a manager’s return is persistent? How can you make sure that alpha is alpha, and you are able to separate that from beta? Asset owners need a toolkit to have these conversations with their managers – and we’re on the leading edge of giving our asset owners that full toolkit before they make their investment decisions with some exciting data science tools.”
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