Finding an Edge in Private Markets

edge private markets

It is widely acknowledged that the institutional investment landscape has not seen much development as compared to the public markets systems for managing data, especially in terms of automation and efficiency.

June 2023

Jorg ambrosius

Jörg Ambrosius
Executive Vice President and Chief Commercial Officer, State Street

To a certain extent, the lag can be attributed to two circumstances:

  • The complex nature of data in private markets
  • Lack of available, consistent and accurate information about real assets or private companies, compared to listed equities

However, for over the past decade, the private markets returns have surpassed the public market benchmarks handily, and low interest rates have enabled easy access to money that could fund deals. There has also been relatively little incentive for the industry to invest in the kinds of technology and process efficiencies that would improve their data management.

In an environment where affordable deals that meet investors’ return targets are plentiful enough to go around, the approach has largely been, “If it ain’t broke, don’t fix it.”

However, post-COVID-19 and Russia’s war against Ukraine, high inflation has seen interest rates shoot up across central bank jurisdictions around the world, raising the cost of leverage for private markets investments, thereby making affordable deals harder to come by.

Meanwhile, low economic growth globally has reduced the number of available deals, and the macro-economic environment has made it more difficult to find above inflationary return profiles.

All of a sudden, asset classes like private equity and debt – as well as infrastructure and real estate – are harder to invest in successfully than they have been at points during the private markets boom of the 21st century. This brings data management back into relief for institutional investors seeking to allocate to these asset classes.

Earlier this year, we published the results of a survey of nearly 500 investment institutions, including mainstream asset managers with private markets divisions, private markets specialist asset managers, nonprofit asset owners such as pension funds, and insurance companies with asset management arms investing in private markets. The results showed not only that private markets professionals are being challenged in ways they had not previously experienced from the global economic headwinds, but also that data is at the center of their plans to overcome these challenges.

A majority of respondents (69 percent) acknowledged that “the increased cost of borrowing has negatively affected the attractiveness of highly leveraged private markets investments.” However, most (61 percent) also want to “continue to allocate to private markets assets consistent with our existing target allocations.”

As discussed above, this is no longer possible in a considerably more competitive environment. The ability to source and analyze opportunities, and provide investors with reliable information about returns, risk, volatility, income streams and much more, are increasingly essential to persuade them to invest.

More than half (53 percent) admitted they are currently “wasting a considerable amount of time and resources dealing with data because of manual processes and outdated systems.” A major challenge for investors in this space is a lack of standardized forms for data to be received or distributed in. Typically, data is stored in spreadsheets containing vast numbers of data points, frequently spread across and updated manually by different business areas, based on the inconsistently calculated information they receive. This impacts analysts’ abilities to accurately assess investments, and affects investors’ faith in the information they receive from their managers.

As a result, it is not surprising that technology and systems aimed at rationalizing and automating data storage, inputs and outputs were important to our respondents. They were asked to assign scores to a number of data-related areas, for both importance to their organizations’ private markets functions, and their relative level of development or competence in those areas.

Centralized, cloud-based data warehouses and lakes, and integrating new technologies and tools with legacy ones – along with better ESG data – were highly important, but relatively low on development.

Finally, and crucially, this is not a “tomorrow” problem. Investment in these tools, processes and systems is happening now. Most respondents (59 percent) have accepted that data management and analysis capabilities have become an important competitive advantage, and more than half (53 percent) are allocating 20 percent or more of their technology budgets to private markets operations. Investing in the right technology and data management systems will provide organizations with an edge. They can continue to realize the benefits – in returns and diversification – that a private markets allocation can bring to a portfolio.

Our latest report, No Going Back: New Realities in Private Markets, provides more in-depth insights into these data and technology developments. Additionally, it deep dives into a variety of other aspects of private markets, including short term allocation intentions within private markets sub-asset classes, the growth of retail access to private markets, and ESG.


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