Thought Leadership, Insights

The Case for Global Standards in Alternatives

Why the ADS Initiative is a game-changer — and an idea whose time has come.

By Scott Ramsey, Executive Director

From horses and pigeons to wires and wifi

Since the 1850s, when telegraph wires first filled the skies above Wall Street — replacing horses and pigeons as the era’s primary communications channel — technology and financial markets have been symbiotically connected. Today’s sophisticated, integrated systems more closely resemble a global nerve net than a trading floor — and financial-market edge is gained less by sharp elbows than by sharp algorithms… not so much screaming voices as screaming-fast data pipes.

But sometimes technology can overrun the markets it’s meant to serve, creating unintended risk. One downside of a speed-as-alpha trading system is that, with its nanosecond-trigger points, it is far more susceptible to volatility and exogenous shocks. Throw a global pandemic into the mix… and investor skittishness around even conventional financial instruments has become an uneasy new backdrop to today’s markets.

This is where the safe haven of data standards grounded in a data culture can make all the difference: they enable better reporting, better visibility and more investor confidence. Unfortunately, when it comes to commoditizing and standardizing the data it uses to make strategic decisions and report results, the alternatives industry has yet to step up to the plate

Alternative investments serve a vital purpose as a hedge against inflation and a counterbalance to conventional assets, and are increasingly found in the portfolios of institutional investors. Yet it’s fair to say that this asset class is not well understood (or appreciated) among the general public. The complexity and illiquid nature of alternatives don’t lend themselves to easy, explanatory sound bites — and unfortunately, where transparency lags, suspicion often flourishes

Alternatives have a PR problem: Transparency, trust, inefficiencies

Private capital management may well seem abstract and numbers-driven, but the bottom line is that it touches humans — and inefficiencies carry both a tangible and intangible human cost. Consider that for some institutional investors, fees can run into the hundreds of millions, and a simple rounding error could far exceed the lifetime earnings of a municipal worker.

Fund accounting is complex, time-consuming, and less than scalable. The inefficiencies of a system where time-to-information between general partners and limited partners is a constant stress point have been sharply exposed by the pandemic. Not only do those complexities eat into net returns, when teams are scattered across home offices, valuation and reporting timelines get extended, and vital speed-to-intelligence is throttled.

Let’s be honest: private equity has a PR problem, and the global disruption and investor anxiety we’re now living through has exacerbated it. The time has come to tackle that trust and transparency gap head on, by bringing benchmarks, expectations and common data standards — not to mention, process efficiencies — to a market that badly needs them.

The ADS Initiative: Why guardrails and standards benefit everybody

The cure for anxiety is a sense of security and regularity on the playing field: in other words, guardrails and standards, on both the investor side and the fund side. Accomplishing such a task would require bringing all participants together to set a common language and commonly accepted data definitions — easier said than done in a fiercely competitive market that, operationally, tends to be set in its ways.

That’s where the ADS (Adopting Data Standards) Initiative, a nonprofit industry group, comes in. A cross-functional collaboration of LPs, GPs, advisors, banks, accountants, and providers in private capital, ADS is laser-focused on one goal: helping the industry tackle the inefficiencies and opacities that unnecessarily hamper its progress.

The group is working to establish global, platform-agnostic data standards that allow for automation, interoperability and greater efficiency in the GP-LP reporting relationship. Importantly, they are doing so in a consensus-building way that fosters engagement among competing firms, for the benefit of all market participants

To help smooth the adoption process, ADS is focused not on changing existing templates but on standardizing the technical language used in electronic reporting files — through tagging and data definitions — with the larger goal of optimizing the time-intensive process of fund accounting and reporting.

Those generally accepted data standards will then provide a solid foundation for the free market to offer technology solutions to support the industry, while bringing clarity and comparability to the marketplace.

MUFG’s commitment: A 21st-century data culture for the alternatives market

Today’s investors want meaningful data reporting and analytics, and managers want more efficiency and greater scale. But unless and until we as an industry speak a common language, we won’t get there.

That’s why it makes perfect sense that MUFG Investor Services was one of the first organizations to support the ADS Initiative. With our focus on embedding a 21st-century data culture — and the benefits of enterprise agility, extendibility and transparency that accrue from that culture — we share ADS’s passion for efficiency, innovative thinking and elevating the functioning of the alternatives market.

If anything, these virtues have become even more crucial in this chaotic time of Covid-19.

While the nature and valuation cycles of alternative assets are obviously different than those of conventional financial instruments, we believe there is ample opportunity to minimize the transparency delta between traditional and alternative investment vehicles, set benchmarks — and enable the kinds of efficiencies and strategic agility that will benefit all market participants, and the industry as a whole, into the future.

To learn more about how we can help you win the benefits of a true data culture, please contact:

Julie Jeffers-Flynn, Executive Director
MUFG Investor Services