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Redmond Lee is speaking at the Private Markets Investor Europe conference on Thursday, March 31.
He will be presenting a presentation on data and transparency and how asset owners are navigating the opaque nature of private markets. You can see the agenda and book your place to attend the conference here.
Redmond Lee: Yes, the need is growing – particularly for tools to aggregate data to perform cross asset class reporting. During Covid-19’s height, people were asking for reports that showed the underlying exposures to various risks. In private markets, we were dealing with fund managers that used to provide quarterly reports and an annual report and that was it. In these reports, there was one page showing what the portfolio is composed of with basic numbers, along with a portfolio company description.
It is not enough to know what is invested top level in the fund, you have
got to look into the fund’s holdings.
Decision making on private investments is increasingly driven by a requirement for comprehensively wide and deep data, and increased knowledge of the underlying portfolio is very important; for example, the ability to tell what exposure is left to hydrocarbons in Russia or what the exposure to Covid-19 is, and how to ameliorate for that, or mitigate that risk.
It is not enough to know what is invested top level in the fund, which these analytics provide, you have got to look into the fund’s holdings.
This has only been exacerbated by ESG – a key requirement of it is reporting financed emissions. To report as a fund manager, you might have money invested in a fund, but the fund doesn't itself produce any carbon dioxide – it is a piece of paper – but this will look underneath at what the fund invested in, which gives a greenhouse gas measurement as it looks through that structure, and it wants to know what is happening at that portfolio company level.
We have evidence that the need for these analytics is growing. Historically, the fund managers have provided their quarterly reports, but having access to the performance data for the portfolio companies is more useful.
Redmond: The analytics can help a CIO to respond in making valuations and also in investment decisions.
Many private markets investments are made via funds that are illiquid because you are committed for that fund’s lifetime, but over the last five to 10 years we have seen a steady increase in the number of secondary market options.
"For Chief Technology Officers, this improvement in data and analytics
is allowing them a seat at the top table."
With the creation of liquidity for a largely illiquid asset class, it is no longer a simple matter of being stuck with investments that no longer fit the bill – you could sell out of certain investments or change the timing of others, if that conformed to your investment theses. The improvement in analytics is allowing this decision making to be more rapid, and to provide the information to CIOs to make these calls quicker too.
For Chief Technology Officers this improvement in data and analytics is allowing them a seat at the top table. Because they are driving those analytics they have a part to play in terms of investment decision making. It is giving them a skillset that is helpful for portfolio companies.
That insight can help to improve portfolio company performance as well.
Redmond: Private markets investment is historically not very scalable because the more fund managers you invest in, the more relationships you have to manage.
Some larger institutional investors cut the number of relationships they have with fund managers from around 100 to 30, a few years ago. They are not changing the allocation, just reducing the number of managers that they deal with. Therefore, they are raising the barrier to entry for new managers, increasing their allocations to existing managers, and building out their direct and co-invest portfolios.
Investors shouldn't miss these opportunities to expand their direct strategies because they are being held back by technology
We are observing the increase in allocations to directs and co-invest and we believe that it is partially due to better confidence based on data-led investment processes. For example, we see top investors asking for access to a fund manager’s deal flow to commit to a new fund.
Access to direct exposure is attractive for two main reasons: firstly, you want to save on the management fee that you are paying to the fund manager. Secondly, when you make a good bet, you want to see all the upside, not a fraction of it. Investors shouldn't miss these opportunities to expand their direct strategies because they are being held back by technology, or the inability to aggregate or interpret this data.
"With a trend to preferring direct investments, you are not going to be dealing
with a world with less data, but more data in greater detail."
The more you learn about underlying investments within a fund, the more that equips you to handle that portfolio because you will see trends within them and notice which sectors may perform or underperform. This can guide you when building a direct or co-invest strategy.
With a trend to preferring direct investments, you are not going to be dealing with a world with less data, but more data in greater detail. The challenge will be to organise it coherently and find the right people to make sense of it.
The views expressed here are Lee's own and not those of EY.
Lee will be presenting a presentation on data and transparency - how are asset owners navigating the opaque nature of private markets? You can see the agenda and book your place to attend the conference here.
This is part two of the conversation. To read part one, click here.
