Investment managers historically have held a mix of both investments in public and private assets. The shift to increasing allocation to private assets over the past 12 years has to do with the fact that, over that time, rates have been remarkably low. Low rates led to depressed returns on fixed income investments, and while equity returns remained strong, consistent double digit returns became less consistent over time. However, investment managers were still looking to achieve consistent double digit returns of yesteryear – so where would they come from? They come from private market investments.
What are private market investments?
Private market investments include sectors such as real estate, venture capital, private debt, private equity, and syndicated loans. There are several factors the lead to increased returns: the liquidity premium that comes with investing in these products, the addition of leverage, and the growth rate of early stage companies.
Where they’ve been
When you look at public market investments, particularly comingled investments. Mutual Funds report quarterly and mark to market daily, and most ETFs report daily holdings and price in real-time like other publicly traded stocks. With private market investments, however, there traditionally has not been the same degree of transparency on either holdings or price. Someone would subscribe to a particular fund and commit a certain amount of capital, and periodically over the life of that fund they would make capital calls. So that fund would issue a letter via fax or email saying you’ve committed, for example, $20m, we’re calling in $5m, so please send that by the end of the month.
These were essentially the metrics that these investors would be tracking: the name of the fund, what the committed amount was, what the allocated amount was, attributes around who the PMs were, what the type of fund it is, and maybe some geographical information. At the time, this was all the investors were concerned with because the allocations were so little, illiquid, and non-transparent.
The push for transparency
As firms become more data driven, they have demanded additional transparency into their holdings, including private investments. They want to be able to do better due diligence into what they’re investing in, and they want better transparency into where their money is going.
Asset Owners started asking their PE Partners (GPs) to send them more information, such as the funds they are invested in, what rounds they are in, and what buildings they are buying, and asset owners were sourcing this directly from the GPs. Now, over the past 3 years, companies like FactSet and Bloomberg have developed data offerings that aggregate this information across GPs which makes transparency and access much easier for these fund investors.
This additional transparency has led to a huge growth of data needs and consumption. There was no concept of a security master for private market investments because there was no information available, and now there is an explosion of data – so now these companies need a comprehensive data model that can logically assemble all these data points into something that the investor can use. For example, the due diligence team may want to see what companies are being invested in, who are the other investors in the funds so that they can put a track record together and make the pitch to the allocation team. Or the portfolio managers who might not need to see all of that information but still need to see the amount of capital they allocated, what’s been called, and what the portfolio companies are.
Historical data challenges of private market investments
This data was historically hard to acquire for a few reasons. Frankly, firms were unwilling to give it up and when they did, since there was no concept of a security master around it, each firm that did acquire the information stored it in spreadsheets in a customized view that they thought was material to them. And with the explosion of data, how can firms effectively conduct due diligence when there are mountains of investment vehicles that they don’t know how to store or track in a meaningful way.
The challenges now are the same for privates as they are to publics: issuer linkages, making sure the firm speaks the same language, all the personas that have access to this data are thinking about it and communicating it across different teams in the same way because firms want to break down siloes with a unified model.
More and more private markets investment firms are now bringing in security mastering solutions because it addresses all of the above issues and has done for decades. The challenges aren’t new; the market is. When coupled with a solution such as GoldenSource’s Data Express, which parses through PDFs automatically, all the information that lives in the offering documents can be pulled seamlessly into the security master with no manual input.
The benefits are much the same as well. Not only does a robust security master provide a single source of truth for your data, but internally, investment firms have more access to better information to make more informed decisions. They now have a way to incorporate this into their investment workflow where previously it was very manual and labor intensive, and have options, such as the data feed offered by FactSet, that can simply be brought into the security master or data warehouse. So if they want to report to their clients or do due diligence, all of this data is at their fingertips as opposed to having to get on a plane, or make a phone call, or dig through documents, because it’s already done.