Stock market data arrives at the speed of light, but as investors plough more deeply into private markets they find challenges with data quality and speed. A Funds Europe panel of asset managers discusses how standardisation and technology are crucial solutions.
Participants
- Brian Slattery, head of Northern Europe, Clearwater Analytics
- Michaela Campbell, managing director, Hayfin Capital
- Louise Jack, COO, Local Pension Partnership Investments
- Victor Mayer, managing director, Pantheon
- Emily Pollock, client director, Schroders Capital
It’s commonly known the sun appears to us as it was eight minutes ago. That’s how long it takes sunlight to reach the Earth. Stock market data reaches us much quicker; nanoseconds for some algorithmic traders who sit close to stock exchanges. Yet given the speed at which data from private markets portfolios travels to pension funds and other sophisticated investors, it may as well be coming from Saturn.
“Six months, typically” says Victor Mayer, managing director, private equity primary and co-investments at private markets investor Pantheon, speaking about the length of time that investors typically wait to receive valuations of private equity portfolios. “It’s never on the day. It could be two months, it could be four, but generally speaking there’s up to a six-month lag in private markets data, certainly for private equity and infrastructure.”
Shockingly, a gap of three months can exist between the operational reporting of a portfolio company into the general partner (GP). Then there are processes to complete before the GP reports to the limited partner (LP), he says.
“This means, more often than not, that the performance you see may not correlate to the trends you are seeing in other parts of your portfolio.”
Causes of the lag can be various but predominantly boil down to the heavily manual nature of private markets administration processes and a disparity that exists between the reporting metrics that are used to explain performance.
“Generally speaking there’s up to a six-month lag in private markets data”
Victor Mayer, Pantheon
This situation makes it difficult for an asset owner – the “LP” in a private-markets fund – to compare the performance of a private-markets portfolio with their allocation to public markets. This presents an issue for LPs who would like to gain a holistic view of the performance of their assets. LPs require a clear view of their assets to not only review the success of their investment strategies, but to also identify portfolio concentration and correlation.
The door opens wider
The breadth of investors in private markets has been increasing over the past decade since EU regulators created a safer regulatory framework for alternative investments, principally with the Alternative Investment Fund Managers Directive (AIFMD) following the 2008 financial crisis. Since the AIFMD, there has been growing interest in private markets from wealthy individuals and large family offices.
Similarly, more asset managers that historically specialised in public markets have launched private-markets businesses. And now, the door to private markets is opening even wider. Recent fund structures – variously referred to as ‘hybrids’ or ‘semi-liquids’ – are likely to see smaller and less sophisticated investors allocate to private assets, with private credit currently the most sought-after across the industry as a form of alternative fixed income.
Semi-liquids balance out the illiquidity risk of investing in private markets by keeping a portion of their NAV in liquid securities, which tend to be cash equivalent in terms of risks, for instance a money market fund. Greater liquidity in their portfolios provided by these assets should help semi-liquid funds to manage the redemption terms they offer, which are more flexible compared to classic private equity funds where money could be tied up for five years. A number of firms have launched European Long-term Investment Funds (Eltifs) in the EU or Long-term Asset Funds (LTAFs) in the UK. Both are semi-liquid funds designed to bridge more investor capital with private markets and boost national economies by investing in unlisted companies.
Emily Pollock, client director of the private assets solutions business at Schroders Capital, said: “As hybrid funds that invest in both public and private assets become more popular, portfolio valuations will have to be carried out more frequently and this requires asset managers to invest more into their systems and processes.”
Schroders Capital launched an LTAF in 2023 and the fund is partly aimed at defined contribution pension schemes – a segment of the asset-management market showing a burgeoning interest in private assets.
“An increasing number of semi-liquid strategies need to price on a monthly basis, which also means going through each company we invest in on a line-by-line basis in order to value it, and this can be very resource intensive,” Pollock added.
She also said that the amount of data that is being required to support private markets investing had increased over the past decade – but at least so had the quality of the data and the level of standardisation, which helps in making data management more efficient.
“An increasing number of semi-liquid strategies need to price on a monthly basis”
Emily Pollock, Schroders Capital
“However, we do still have to invest significantly in our teams and processes, including in AI, to be able to manage the data,” said Pollock.
Brian Slattery, head of Northern Europe at Clearwater Analytics, said that as institutional allocations to private markets has grown (along with the regulatory scrutiny that developed in tandem with this), asset owners need to gain a comprehensive picture across public and private markets portfolios in order to understand their exposures and levels of concentration risks. The different speeds at which data flows in each market is challenging, creating a tendency to see each market in isolation.
“Investors want to be able to combine data in order to give them a panoramic view of their portfolios,” added Slattery, “that not only helps them make better investment decisions, but also supports internal and regulatory reporting.”
The start of complexity
The challenge of data management – whether it be for better investment decisions or for faster and more transparent stakeholder reporting – increases as an investor’s private markets portfolio grows and evolves in complexity.
Louise Jack, chief operating officer at Local Pensions Partnership Investments, which manages around £25.7 billion of assets for a number of local authority and other public sector workers, said that an investor’s private markets investments would typically start with a low volume of assets, perhaps just five investments made per year. Investors “can quite easily cope” with manual data processes at this stage.
“But as they continue to allocate to private markets there becomes this growing pile of assets that are accumulated, and to obtain data on an ongoing basis in support of these assets, this is where the complexity starts. Either the data is not complete, or you struggle to record it, or you don’t get it at all. The point arrives where you need to start automating – which can be hard to do.”
As portfolios widen and data proliferates, problems caused by a lack of standardisation in the market become more apparent.
“LPPI makes quite large investments. With the relationships that we have, we find that we can get the data we need. But for the industry in general, investors will find that data very quickly accumulates and it can arrive in so many different formats, which can make it difficult to then transform the data into being useful. So, it’s not just a question of whether you can get the data, but also a question of what you can do with the data once you’ve got it.”
“Investors want to be able to combine data in order to give them a panoramic view of their portfolios”
Brian Slattery, Clearwater Analytics
While data in public markets is easily available, commonly defined and broadly understood, private assets are opaque in nature. For starters, private markets investments can span equity holdings in small companies through to large, infrastructure projects where financial arrangements have become increasingly complicated by state involvement.
This complexity due to the disparity between diverse asset classes only increases depending on the structures through which those investments are made. Michaela Campbell, a managing director in the direct lending team at Hayfin Capital, noted that investments made by sophisticated portfolios range from direct investments in a company, through to indirect investments made via a fund-of-funds. The picture is made yet more complicated when a GP invests in the same company through different structures.
“There are times when data reported on the same investment is inconsistent and a challenge for the industry centres on how we resolve that issue, particularly as the industry grows.”
Third-party providers
Private markets have not been immune to the explosion in data over the past decade. Regulators have pushed investors to gain and report more data on the investments they make, meaning that, over time, private markets have become comparatively more transparent and slightly less private. This trend continues apace, with measures now to make private market valuations more frequent.
Along the way, more data providers have entered the market, inserting themselves between portfolio companies, GPs and LPs. Providers help bring transparency to the market and, where possible, a degree of standardisation. They also serve to automate processes and, crucially for GPs, provide platforms on which to scale-up businesses.
Louise Jack, of LPPI, says as the demand for data has grown, the market in data providers has become crowded. “There are a number of data providers in the market now who are all approaching general partners in order to collect data and this to me does not feel sustainable.
“There are times when data reported on the same investment is inconsistent”
Michaela Campbell, Hayfin Capital
“GPs once had to field requests from two or three data aggregators; now it’s more like 20-30, and each of them has different formats. I wonder where this is going because surely GPs will reach a limit.”
Michaela Campbell at Hayfin agreed with the sentiment and said there was pressure on GPs to evolve processes to meet the expectations of LPs.
“LPs may want reporting in a specific, standardised way and GPs need to have systems in place that allow them to deliver that quickly.”
She added: “Standardisation would be greatly beneficial. To have as many people as possible ‘singing from the same hymn sheet’ would lead to operational efficiencies, albeit there may always exist geographical differences in market practices for GPs and LPs that operate at the international or global level.”
“Competitive differentiator”
Campbell said that the ability to respond to this demand would be a competitive differentiator for GPs – a point with which Clearwater’s Brian Slattery strongly agreed. According to Slattery, smarter data gathering and better data dissemination serves to differentiate GPs. So much so that the higher rate of client satisfaction this leads to makes it more likely that a GP would experience successful fundraising downstream.
“We have seen that those GPs who are able to provide greater data granularity to LPs are then the GPs who tend to have more success in subsequent rounds of fundraising,” said Slattery. “There appears to be a correlation between the quality of data provided to LPs, and the smoothness that the GP finds with fund-raising for another funding round or vehicle at a later stage.”
Technology providers need to be flexible about how they ingest data, accepting that GPs will report differently. But technology providers also need to try and bring consistency surrounding how data is reported, with the aim of achieving a universal, golden copy of data that combines private assets with public assets in one comprehensive viewpoint.
Slattery said standardisation of portfolio valuations is an issue the industry needs to solve together but that he doubted it would be fully achieved. “It’s a problem that the industry needs to collaborate on. However, due to the nature of private markets, I do not think there will be a standardised valuation service across the board. What this means is that new investors need to be educated about this as they enter the market.”
Slattery also pointed out that many of the pain-points for GPs exists in their operational models, which could be outsourced.
“The outsourcing model in private markets has now been around for ten years and I can tell you that it does run very smoothly.”
In reference to Louise Jack’s earlier comment that setting up an automated process can be difficult, Slattery said: “Once a process has been set up and has run a few times, a kind of ‘muscle memory’ is established and the hurdles that you encountered are removed. A tipping point is reached and firms find they can scale.”
Inherent privacy
Louise Jack said that some of the challenge of delivering standardisation to private markets was to do with the inherent privacy of the asset class itself. Privacy prevented market actors seeing how others received or presented their data.
“GPs once had to field requests from two or three data aggregators; now it’s more like 20-30”
Louise Jack, Local Pension Partnership Investments
“A thousand factsheets for retail funds can be found on the internet and they are all basically in the same format. But in private markets, because this asset class has generally not been available publicly, firms have not been able to glean how their peers do things. This meant common reference points driven by the market itself were not created.”
Victor Mayer of Pantheon said it would be “impossible” to fully standardise private markets – and likely it would be undesirable. People entered private markets “for a completely different experience to what they see in public markets”.
“Standardising the approaches to valuations, for example, could lead to private-markets assets becoming more volatile, like in public markets, and this defeats the object of why people would allocate to private markets. They come to this illiquid asset class because it offers a different experience. It is an asset class perceived as being more stable compared to liquid, public markets.”
However, Mayer pointed to how one piece of UK regulation is helping drive standardisation and transparency.
“In the UK the Consumer Duty has been very helpful for investors. It forces firms to explain everything in their offering memorandums in a clear way that even your next-door neighbour would understand. Historically, these things were written in Latin as far as most people were concerned! So, regulators introducing regulatory frameworks around communications has meant that investors benefit from a level of protection and transparency that is unprecedented.”
Emily Pollock at Schroders Capital agreed, saying the Consumer Duty had helped fund managers speak to an audience “where perhaps private markets was not their first language”.
From Saturn
Private markets data appears to have travelled an astronomical distance before arriving with investors. Despite its tardiness relative to public markets, over the past 20 years, said Emily Pollock of Schroders, private-markets data had become more prevalent, clean and useful.
Some challenges still exist: greater frequency of valuations, the creation of more meaningful benchmarks, and whether the internal rate of return – or “IRR”, the typical way that a private equity firm will value an investment’s yield – should be replaced.
Regulators have forced private markets data into the light of day. Data providers and LPs have striven to provide some consistency where possible. GPs, meanwhile, have either struggled with the issue – or embraced technology to run with it and grow.
