McAllister (Mac) Kirschner, Chief Operating Officer

The key components driving the transformation of the global alternatives (alts) industry are clear: Unspent capital sitting in private markets and the influx of high-net-worth investors have fund managers preparing for a trillion-dollar tsunami in the alternatives marketplace.

Identifying the potential opportunity was one thing; now fund managers are turning to trusted service partners to reengineer operating models and ensure they have the operational and technology capabilities in place to handle that inflow of clients and capital. For some funds, it will mean fundamentally restructuring the way they do business, which won’t necessarily be easy and will take time.

Typically, a handful of institutional investors might be the sole investors in a large fund, which could be documented using Excel spreadsheets and straightforward workflow. Going forward, we’re likely to see dozens or hundreds of high-net-worth investors represented by registered investment advisors who aggregate funds to provide access to alts, or in some instances, those investors will enter the alts market directly. With that growth will come infrastructure, process, and staffing challenges, especially as new products provide easier access to alternatives.

As volumes increase, fund managers are already struggling with services including distribution, traditional fund accounting, client onboarding, Know Your Customer (KYC)/Anti-Money Laundering (AML) compliance, investor notices and reporting, managing large volumes of new data, and asset operations. Determining how to address those operational challenges is critical for fund managers and their service partners, whose roles have grown to encompass back-, middle-, and now front-office functions.

Reconfiguring traditional asset servicing functions means reexamining service level agreements, replacing legacy technology with new automation, developing new processes, and shifting from generalists to a specialized workforce to ensure that the most skilled employees are performing the highest value tasks. Many of these discussions revolve around processes to maintain profitability while limiting expenses. For example, as the number of investors grows, funds must introduce scalable infrastructure to manage smaller individual investments and lower revenue-generating opportunities per client. Without cost-efficient infrastructure and straight-through-processing, funds will use more hours to service the larger number of smaller clients, which will drive up costs.

Some partner solutions are already being implemented to address industry pain points. For example, one of industry’s largest firms recently began using a new, outsourced platform to eliminate delays in opening client accounts due to KYC/AML onboarding requirements—a lengthy process that is a frequent target of customer complaints.

Increasingly, fund managers are turning to partners to explore ways to introduce technology, process volumes of new data, and explore artificial intelligence to improve performance, services, and the overall client experience.

While some choose to invest resources on proprietary systems, others are implementing partners’ new cloud-based data solutions and platforms, or coordinating to build new pipelines and application programming interfaces to ensure connectivity and efficient data transfer. In some cases, fund managers are maintaining their own systems but bringing in partner teams to staff them.

Establishing strong data management is a vital element of new transparency and disclosure rules from global regulators, often with competing demands across jurisdictions. Partners are implementing new platforms that monitor disclosure requirements, harmonize data, and offer tailored, automated reporting for individual jurisdictions, eliminating the need for multiple submissions of similar information.

As the alternatives markets evolve, fund managers and trusted partners must maintain close working relationships to create new operating models that will enable partners to better serve their clients and fund managers to focus on driving new growth and long-term success.

This article was originally posted in the April 2024 edition of The Alternative Investor.