This article is sponsored by eFront Insight.
Now part of BlackRock, eFront provides software solutions at the crossroads of public and private markets. What are the most striking differences between the requirements of the two worlds?
The obvious difference between public and private markets is the transparency of data available. Private markets are far behind on this front, yet in many ways this lack of data is the fibre of the industry and as new investors enter the market, they will need to understand that. However, in the last 10 years, service providers have put a focus on giving investors greater access to data around their investments.
What seems relatively simple in public markets, like ESG for example, is a much greater challenge in private markets and it requires creative solutions to be able to give investors the ability to understand the risks within their holdings.
There is also a lack of standardisation. If two asset owners are invested in the same fund, they could be subject to different data rights depending on their limited partnership agreement. That is clearly different in public markets. Limited or incomplete data that is not normalised leads to a lack of meaningful analytics.
All this creates limitations on the ability of investors to aggregate data at scale, which is currently a very labour and time intensive process and does not necessarily deliver the level of quality an investor would legitimately expect.
What is driving convergence between the two?
There are some broad trends driving convergence, including pressure on performance, allocations to alternatives increasing, broader asset class exposure, sustainability, and market volatility, particularly in 2020. As we see large allocations to private markets by investors that are highly regulated and are also heavily invested in public markets, such as pension plans and insurers, there is a push from regulators and investors for convergence in order to compare performance. Private markets are trending towards a larger proportion of insurance asset allocations, which means regulators are going to take more interest in private equity transparency.
Public and private markets should, and likely will always be viewed differently. Each have their own lenses and audiences and, as a result, the requirements to manage the asset classes are different. However, it is vital from a risk and portfolio construction perspective that investors can build common dimensions on exposures across their portfolios.
The same applies within asset classes within private markets – typically investment teams will focus on different assets (private equity and real estate, for example) and while there are very different ways to assess performance in each – there is enough commonality to create a consolidated view. We are seeing ever increasing demand for highly specific point requirements within a specific asset class, combined with a more generalist lens that can be applied to all asset classes. The ability to compare private equity to real estate or private debt is going to be something that investors are increasingly focused on.
How is technology supporting and enabling this convergence?
It is a challenge, but also an opportunity. The acquisition of eFront by BlackRock brought together two of the world’s leading technology service providers in public and private markets – we have been getting specific on key asset classes as well as providing a holistic view across private markets, as we have done for years in public markets. We are now able to support investors with a whole portfolio offering and sophisticated risk analytics through the integration of private market data platform eFront Insight and Aladdin, BlackRock’s investment management and operations platform.
Ultimately, great analytics will fall apart if they are not leveraging great data. In private markets we are still living in the world of the PDF, so we are investing heavily in automation to support the availability of data for our clients, just like we did years ago in public markets. The challenge is that there is over 40 years of data currently in hard copy in private markets that needs to be digitised to be usable.
Rather than trying to make the industry change overnight, we are focusing on what firms have in common, which is access to the documents they need to digitise. As you get greater access to more and more data, putting robust analytics on top of that becomes critical. Firms and service providers will stand apart in their ability to capture and digitise this data and then harness the power of the data.
How do software providers need to adapt if they are to stand out in the face of this market evolution?
This is becoming an issue for all market participants, who need to come together and leverage the power of the network and use service providers as a facilitator of operating at scale.
We see a lot of firms going down the template route, for example, which is great for an LP as long as all its GPs are using the same template, but that is unheard of. Not every GP is going to be willing, or operating at sufficient scale, to complete bespoke templates for all investors. That is where technology and software providers need to adapt to understand that templates are great, but we need to move past that because it is taking GP time away from value-added activities such as managing their portfolio of assets in the best interest of their investors.
In terms of what it is going to take to stand out in this space, it is breadth of private market expertise as well as availability of public markets expertise, aligned to create a strong client network and critical mass.
What should fund managers expect from providers?
GPs should expect an opening up of the market, which will create more data flows, but also an expectation of more transparency, better systems and enhanced data management. In the last 10 years, we have seen a significant shift and a greater willingness among GPs to understand that more transparency means more investors get comfortable with the asset class and more money flows in, which is good for everyone. Furthermore, alternative data is opening the door to a digitised world for private companies. Such data, in combination with machine learning, can be used in real time to further exploit dislocations and identify growth equity opportunities missed by traditional models, which in turn could drive superior returns.
Do you see private markets losing their magic as a result of these trends?
No, and in fact, making private markets more accessible and less alternative will highlight the quality of the asset class, which will result in increased allocations and competition. The knock-on effect will bring greater demand for standards and governance, which will enable technology providers who are ready for these changes to provide more capable solutions. Private markets are likely to remain more relationship-driven but will need to evolve to be able to accommodate more diverse investments while also putting their capital to work in order to maintain a return advantage. Private markets will continue to provide alpha generation opportunities and diversification.