Greater transparency in private markets will make it easier for a larger number of investors to invest in illiquid assets, according to Clearwater Analytics’ global head of alternative investment solutions Jonathan Flitt.
The “majority increase” of investment in private markets over recent years was driven by diversification and by a larger swathe of ‘traditional’ investors seeking healthy risk-adjusted returns and yield from long-term capital opportunities. The scale of investment bolsters the view that more European companies consider it viable now to remain private for longer, perhaps forever. Institutional clients have become important sources of non-bank finance for unlisted companies.
But the opacity of private assets is a problem for investors, who are accustomed more to a deluge of information that illuminates their holdings in public markets.
“Our belief is that for asset managers to be positioned for growth in private markets there is a need to increase transparency,” says Clearwater Analytics’ Jonathan Flitt. “We recognise this won’t change overnight but, as a tech provider, we invest in technology to deliver transparency using electronic and unstructured data to give investors a greater level of transparency for reporting on their portfolios.”
Flitt has an extensive background in wealth and asset management across both traditional and alternative markets. Flitt leads product management, strategy and execution at Clearwater Alternative Investment Solutions. He works closely with users of Clearwater LPx, a solution for private funds that delivers automation, transparency and reporting and streamlines private markets investment oversight.
Illuminated holdings
Underpinning the demand for greater transparency are several forces. The broad growth of the market, with more pension funds and insurers becoming active, is one. So, too, is the trend of ‘democratisation’, which is expanding the pool of investors even further to a more retail-like audience. As this happens, regulators – ever conscious of investor protection – require greater look-through for themselves and fiduciary managers.
“In effect, we are betting that transparency will make it easier for investors to participate in private markets”
Jonathan Flitt, global head of alternative investment solutions, Clearwater Analytics
“Also driving transparency is the simple fact that the technology now exists to do it, and what’s more, the technology enables private market processes to become more automated, which in turn helps firms to scale and meet the greater demand from new audiences,” explained Flitt.
Describing Clearwater Analytics’ process, Flitt said: “The transparency of the underlying investments essentially comes down to illuminating the holdings in the portfolio and the operating metrics and performance of the fund, along with any ESG considerations, such as climate ratings.
“Clearwater brings transparency to the level of the investor’s cash. It’s important to understand what the likely pattern of commitments is going to be. This pattern of commitments – known as the ‘J-Curve’ – shows how cash works over a period of time.”
The J-Curve in private equity shows the trajectory of investments made by a general partner, whereby cash early on in the investment cycle makes a negative return, only to tick upwards over time. “In effect, we are betting that transparency will make it easier for investors to participate in private markets,” Flitt adds.
Feels more like public markets
Clearwater Analytics is increasingly deploying generative AI to extract data from source materials such as PDFs. GenAI’s strength is in its speed and ability to free users from repetitive processes.
“The latest iteration of LPx includes CWIC LPx, which uses embedded generative AI to extract data from external documents and from our own underlying database. Prior to CWIC LPx, you had to pull data manually, often searching through multiple files and documents. Generative AI allows a user to get information in seconds, not hours, which gives investment teams more time to work on creating value.”
Clearwater has developed ‘copilots’ to give clients more information at their fingertips. Some clients have investments with GPs across the globe so this Gen AI-based tech that helps them read statements in foreign languages is a game changer.
Overall, this level of automation could make private-market processes feel more like public markets, where data moves considerably faster. This is an important point, says Flitt, given private markets are increasingly aiming at a retail-like audience.
Standards success
Greater standardisation, added Flitt, will help drive transparency and automation, but it is hard to drive standards without regulation. “Outside of regulation, I’ve seen more success in creating standards when it’s driven by a utility rather than from a commercial provider. Nevertheless, it’s a job for the industry to try and drive for more standardisation of data.”
One success has been the ILPA principles, an initiative from the Institutional Limited Partners Association to create best practices between GPs and LPs covering financial disclosures.
“Not everyone adopts ILPA, and in Clearwater’s experience, less that 50% of GPs conform to ILPA’s standards,” said Flitt.
Eventually AI will add alpha to investment decisions, says Flitt, because GPs will find they can make sense more quickly of large volumes of data.
And with a retail-like customer emerging, there is a growing need for valuations to be more frequent and this means that GPs will need their data to be more quickly available and more easily accessible.
“This could be a challenge at first, but the whole ecosystem will benefit from it.”
