Investor demands drive data investment

The need for managers to enhance the sophistication of their use of data tools is under increasing pressure, say Howard Eisen and Mike Gorman of TMF Group.

This article is sponsored by TMF Group

What are the current hot topics for fund managers with regard to portfolio monitoring and analysis?

Howard Eisen
Howard Eisen

Howard Eisen: A common thread is the standardisation of data. People can have varied opinions on what constitutes, for example, light covenants or ESG factors, but fund managers that consistently apply their chosen metrics over time, across funds and investments, will get actionable analytics for use internally and with their LPs. And as more managers outsource portfolio accounting and reporting, it becomes apparent that administrators may well be the leading source of portfolio monitoring solutions.

On the debt side, often deals and opportunities are sourced via proprietary networks, meaning one of the USPs of any debt manager is the robustness of its deal-sourcing network. How does a manager assess which sources are truly generating opportunities, whether deals from certain sources come with better pricing, fewer protections, lower default rates, and so on?

Tracking loan-data terms and conditions against sources can help a manager to really spend time cultivating the sources that are generating the best opportunities as opposed to those that generate less attractive opportunities.

Mike Gorman
Mike Gorman

Mike Gorman: This is all about data management. The whole industry was using proprietary systems 15 years ago and now there are systems coming through to help collect, analyse, scrub, store and trend this data to get consistency. The challenge is to help investment managers put systems in so that they can analyse and evaluate deals and benchmark those deals against others. The amount that managers want to understand and share with investors is increasing and systems are developing to support that.

What particular challenges arise in relation to performance attribution?

HE: Investors are getting more granular in their desire to deconstruct returns, because there is a desire to know where alpha is coming from and how one manager’s return stream differs from another. Investors are looking closely at geographies, sectors, deal types and where managers are investing across the capital structure to see what is driving returns.

For a debt fund, what percentage of return is coming from upfront fees versus regular interest payments versus the sale of collateral is also in focus. Being able to deconstruct where returns are coming from allows a manager to demonstrate their value-add and an investor to understand where they are going to get the returns they are seeking.

MG: This demands a reliable data set to analyse, so it is forcing the collection of information from the underlying portfolio in a consistent manner. Usually on the debt side you can get that, but banks continue to struggle with it and they have been doing this a long time. Many fund managers are getting way more sophisticated than the banks now, which is interesting.

How are PE managers leveraging research to identify deal opportunities?

HE: There is so much asset class consolidation, with private equity managers moving into credit, hedge funds moving into private equity and so on. When you think about the amount of research that goes into a manager assessing a deal, only for that data to be set aside if the deal doesn’t happen, there’s a huge opportunity there.

What may not be suitable to the PE business could be a legitimate credit opportunity, so it makes sense to have a referenceable database of research to share opportunities and analysis across teams. This can help inform decisions about that company, and also its peers and the industry segment. Storing that research, categorising it and making it referenceable to feed other parts of the business is immensely valuable. There are external platform providers, like DealCloud [from Altivia Solutions] and iLEVEL [from IHS Markit], but managers need to ask what they are trying to achieve and whether they should have an in-house or outsourced solution.

MG: Managers are collecting this data and looking for systems to streamline it and pull it together. We have helped clients get to the next level, pulling some information from one system and some from another to create a useful dashboard. You are seeing a lot of tools being developed to sit on top of other systems and pull out the bespoke information the GP and its investors can utilise. We also see firms investing in more sophisticated CRM systems. Those are not new, but the sophistication of debt managers, and their ability to leverage data, just continues to increase.

What are the latest developments in management data solutions for portfolio tracking?

HE: LPs are demanding more information and so are regulators, particularly around ESG. That requires GPs to be consistently applying the same metrics and the same tools for measuring portfolio benchmarks.

The same is true with operating metrics, where it is about how you compare Company A to Company B and Company C with respect to balance sheet strength, operating margins and gross margin, and then use that analysis to respond to investor queries.

There will be some LPs with very specific requests. The manager that can say they track all these metrics across the portfolio and can quickly respond to LP questions will be the one that wins additional commitments.

MG: A lot of private debt is now going into assets severely impacted by covid-19, where government support is drying up, which requires close data monitoring. Managers require results a few days after month-end so they can dig into what is going on in those businesses and carve through data for quick analytics. If you have 100 deals in your portfolio like that, the value of those flash reports is significant.

HE: We are hearing a lot of demand for visualisation tools to present data in a compelling way to investors. In a post-covid environment where everyone is operating in “2D”, finding a way to slice and dice the numbers to bring stories to life through visuals is high on the agenda.

What trends are you seeing in relation to metrics and benchmarking?

MG: If you source your own deals, you need that deep understanding of your industry peers. Firms talk, and we have clients coming to us saying they want to be able to achieve something they know others are doing. There is a disparity between firms that have invested in this over several years and others. If you are going to be competitive, you have to be able to pull good benchmarking data. As the underlying investors compare managers and collect information, they are setting more hoops for managers to jump through and demanding more data during due diligence.

HE: Things have evolved from just a few benchmarking categories to the point where there are now so many different fund strategies, types of managers and verticals. Trying to benchmark in a more granular way is necessary for managers and investors to find the most appropriate space. It is about choosing who to compare with and digging deeper into the metrics to achieve meaningful comparisons.

Howard Eisen is head of sales, Fund Services, at TMF Group. Mike Gorman is managing director and co-head of Fund Services, North America, at TMF