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Optimizing The New For The Now

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MUFG Investor Services’ chief commercial officer Joseph Latini discusses how preparation and execution are key to success in new global alternative markets.

What are the key components driving the transformation of the global alternatives industry?

The key word here is “new”—new capital, new investors, new technology, and new regulations. The alternatives industry faced significant challenges during the last few years, including rising interest rates, inflation, and global geopolitics. All those factors led to declines in deal value, deal counts, exit value, and fundraising.

Market conditions have eased somewhat, with new capital and investors poised to enter the market. Funds collectively raised $145.3 billion on their final closes for 2023, a 19% increase on the same period last year, according to Preqin. Industry studies indicate there is some $3.9 trillion in alternatives capital ready to be invested. The  increase in high-net-worth investors seeking diversification in the alternatives market is expected to introduce an additional $500 billion to $1 trillion in fresh capital in the coming years.

New technology, including cloud-based systems and automated platforms, will be required to effectively manage the flood of new capital and investors—and the volume of data being produced—for back-, middle-, and front-office functions. Technology also will play a crucial role to ensure that fund managers and their partners comply with a host of new regulations focusing on suitability, disclosure, and transparency across global jurisdictions.

What are the main operational challenges facing fund managers and their service partners currently?

For many fund managers, it’s time to re-examine and re-engineer their operating models or identify specific functions that will be outsourced. They need to ensure that the teams, systems, processes, and technology are in place to accommodate the new alternatives ecosystem.

The challenges can range from client onboarding, distribution, asset operations, and traditional fund accounting to new data management tools, investor notices and reporting.

In some cases, we’re working with fund managers on discrete projects, or we will have our teams work within their systems. As that partnership builds, and we develop a greater working knowledge of their business, we can create new tools to meet their needs and offer more insight for improving their processes.

How can newer technology, such as AI, help with the industry’s main operational challenges? What still needs to be addressed?

Streamlining data management and processing will be critical to meet increased disclosure expectations. In the past, we’ve seen fund managers rely on Excel spreadsheets for maintaining and reporting information. Now, they must implement secure, automated systems to process data and create accessible, “golden sources” to meet multi-jurisdictional disclosure requirements and reporting needs for investors.

To accomplish that goal, fund managers will rely on partners that can interpret new regulations and build platforms with standardized reporting fields that can be harmonized with multi-jurisdiction requirements. These common data platforms provide great flexibility by processing information about clients, investors, funds, portfolios, and transactions, then translating that information into a standard syntax and flowing it into a secure “data lake” with highly controlled access. This process helps to eliminate inconsistencies and provides a clear audit trail that can be used for management and regulatory reporting requirements, and analytics for investment strategies and trends.

For example, a client is using our platform to comply with AIFMD Annex IV reporting requirements in 11 European Union jurisdictions by submitting verified information in the  proper fields and format for each at the same time.

Artificial intelligence holds incredible potential for the industry in areas such as, but not limited to, client data, investment analytics, distribution, and marketing. But we are in very early days with AI, and our industry needs to establish clear guardrails for governing its use as regulators will be moving toward their own rules for AI.

What does it take for outsourcing firms to stand out in the current market?

No one should want to be considered an “outsourcing firm.” The best firms want to be thought of as a “trusted partner” that knows the business and has a long track record of providing exceptional client service and innovative solutions.

As the alternatives industry evolves, fund managers must decide whether they want to expand with full-time staff for back-, middle-, or front-office functions, or use partners who will manage those same tasks less expensively and more efficiently. Increasingly, managers want a single, trusted partner with a breadth of offerings to address their needs.

The best firms know that exceptional client service means creating a superior experience that builds loyal, long-standing relationships, rather than solving individual problems. It means being a partner that will execute flawlessly every day, that can leverage its own state-of-the-art technology, and has a global scope to monitor the market and regulatory environment.
With that type of partner, fund managers can invest their often-limited resources in driving new growth and increasing revenue. The idea is, “let us focus on what we do best, and you focus on what you do best.”

What are the key considerations for fund managers to consider in light of new disclosure and transparency regulations demanded by regulators?

Preparation is key to successfully navigating the wave of new regulations. Disclosure and transparency regulations are at the top of the regulatory list now, but it seems clear that regulators also will be moving toward explicit rules governing artificial intelligence solutions.

I have already mentioned the opportunities and challenges stemming from the influx of new capital and new investors from the retail markets. Regulators want to ensure that fund managers are properly prepared to handle the capital, and that those investors—who are used to receiving detailed information about pricing, expenses and distribution—have a clear understanding about the benefits and risks of alternative investments.

As a result, fund managers must provide more information faster than ever before. We’re seeing increased outsourcing for monitoring regulatory and disclosure reporting requirements, including investor terms, fund expenses, and fees.

Industry trade groups have challenged some proposed regulations in the UK and US, and sought greater input on rules. The important point here is that fund managers do not need to begin additional reporting before rules take effect, but need to be ready to move quickly when they do.

This article was originally posted in The Drawdown’s 2024 Fund Admin Report.