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What are the new digital foundations of private capital?

By Michael Gull

The table stakes for fund administrators haven’t changed. Fund managers, private equity firms and others will always want responsive service, accurate and timely reporting, and compliance.

But table stakes aren’t enough, as we recently heard from Bill Salus of Paddock Capital Markets on 4Pines Fund Services’ Private Capital Strategy Series.

[See the full webcast here]

Asset managers are increasingly interested in a fund services provider who can ingest and normalize their firm’s financial data and, especially importantly, yield insights on how that data might give them a competitive edge. Many see how this works well for companies they buy. It may be an element in their business building thesis. So why not for their own operations?

That means fund administrators need to expand beyond their classic back-office document and spreadsheet processing functions. A profession that once revolved around the general ledger is now broadening in scope to encompass the larger universe of data operations, Salus explained. Data can populate the general ledger, but it can do more if well organized and directed.

Fund managers want to keep their focus on raising capital, developing better investment products, executing on their vision… but industry leaders are also realizing the imperative of savvy data operations. That may be in part because investors and LPs are applying pressure on the digital front. So, managers are looking for trusted partners to help navigate this digital transformation.

Newer, high performance fund administrators are poised to fulfill this role. Those who offer multi-faceted and configurable data services will help clients — and themselves — grow in the years ahead.

Handling data

Just a decade ago, most fund managers were wary of adding new technology on top of their prized legacy platform. Fund administrators were content doing most of their calculations using Excel. At some shops, little has changed, according to Salus. That’s a testament to the power and glory of Excel.

But client expectations are changing faster, especially after the pandemic when new work patterns uncovered new opportunities for efficiency. Many investors and advisors are looking for advanced technology, and to better understand what it can do. They want service providers to be as innovative as the fintechs threatening to disrupt the edges of the larger financial services industry. As a result, most large service providers are developing digital strategies that deploy an array of new technologies around their core platform.

Specific technologies and vendors may vary, but what really matters is how successfully these solutions transform data operations. There are four steps: standardization, automation, customization and integration.

This approach entails normalizing/structuring data from different sources, like spreadsheets, PDFs, and reports, into a single system; doing that automatically via a robust tech platform; tailoring that platform to address clients’ specific needs; and making that platform accessible to both the fund services provider and the client.

There are older versions of this, that have been tried by many leaders in the industry. They proved hard to use and still employ an awful lot of labor to bridge the gaps. But just like power steering suddenly changed the driving experience – for those that remember – new data operations now give more freedom of movement and agility.

Service providers with the right tools and culture, and their clients, can take those four steps, and ultimately achieve secure data integration between each other, and the client gains significant capacity to generate actionable insights and build more trust with LPs.

Data is growth

The investment industry is reported to have sunk nearly $3 billion into AI by now, a 75 percent increase since 2017. As Deloitte put it, the financial services industry has entered the artificial intelligence phase of the digital marathon.

Salus shared an anecdote that helps explain why fund managers are suddenly ramping up investment in a digital transformation and why that connects to data operations.

Investors looking into the fund services sector have started to include technological maturity as a dimension of their due diligence. If managers don’t have a coherent digital strategy, it raises concerns about redundancy in accounting and compliance. But it also signals that they aren’t ready to grow.

In short, data operations have become a core part of the business. If asset managers don’t have their data house in order, they risk scaring away client and investor money. In this industry, that’s all the motivation you need to change.

But that’s also a little unfair. It’s easier to build a digital foundation for a new house, than try to change the foundation of an old one. Legacy fund services firms are at a remarkable disadvantage in this new market, despite their heft and the budget they can spend on software. It’s more than the software. It’s the culture, something we know incredibly well here at 4Pines.

Michael Gull is Chief Revenue Officer at 4Pines Fund Services.