Recent market volatility has led to increasing interest from asset owners in active portfolio monitoring. In this context, we explore how investor services providers should approach the needs of asset owners as distinct from those of asset managers.
First, let us clarify the difference between ‘asset owner’ and ‘asset manager’, since boundaries can be blurred. Often referred to as limited partners (LPs), asset owners are generally the institutions or people – pension plans, insurance companies, official institutions, banks, foundations, endowments, family offices and individual investors – who own the actual assets.
Meanwhile, ‘asset manager’ refers to the universe of financial professionals who manage money, securities and other forms of asset on behalf of an asset owner. Their goal is to grow the value of the assets under their management. There are many different forms and specialisms of asset manager, including mutual fund managers, investment advisors, alternative investment managers, financial advisors, wealth managers, stockbrokers and – in this digital day and age – robo-advisors as well.
Increasingly active involvement of asset owners
As an investor services firm supporting both asset owners and managers, IQ-EQ has witnessed a clear trend towards asset owners becoming more directly involved and actively managing their private portfolios.
Banking major BNY Mellon notes that there could be four key drivers of this change, not least of all being a need for increased transparency in the face of lofty ESG-related targets.
The second proposed reason is cost, as managing the portfolio helps LPs avoid the management fee and performance or ‘carry’ fee structure typical of the alternatives arena.
Changing regulation, too, is pushing asset owners towards taking on the mantle of manager, in order to achieve a tighter grasp over their portfolios as compliance obligations intensify.
There are also some LPs that have owned alternative assets for many years and choose to rely on this experience to manage their own private equity funds directly, rather than outsourcing to an asset manager.
That all being said, IQ-EQ has been delivering investor services to both asset managers and asset owners for many years. Based on our first-hand experience, we can state with confidence that servicing an asset manager is different from meeting the needs of an asset owner. As such, we have separate divisions within our firm to service these two distinct groups.
What it takes to service an asset owner
Indeed, there are quite a few factors that set owners apart from managers – each necessitating an elevated level of service delivery:
- Taking analysis to the next level:
Asset owner or LP servicing not only requires the recording and processing of transactions but also interpretation from a performance perspective, as well as portfolio diversification analysis. Further, the team must be able to provide reports or analytics using the preferred terminology of LPs and their fund managers. - Enhanced technical capabilities:
Servicing an asset owner demands much wider technical capabilities than a typical fund administration solution may be geared to provide. Interaction with the IT team must be a continuing thread of servicing an asset owner, and enhanced technological resources are critical to fulfilling short-notice analysis requests with accuracy and speed. - Performance reporting is key:
Needless to say, the focus of LPs is on the performance of their investments. Therefore, they require extensive performance reporting solutions from their administrator. Having a single team process the transactions and provide performance analytics helps promote client engagement and enables active query management, which in turn is key to receiving data that is relevant, reliable and accurate to assist with portfolio monitoring as well as decision making.
A daily operating model is more cost effective and sustainable than it has been in the past owing to advanced data ingestion capabilities and machine learning for repeat tasks
- Daily operating model to better manage liquidity and exposures:
LPs require a daily operating model that allows them to arrive at the net asset value (NAV) of alternatives, together with liquid assets, to see a consolidated view of the entire portfolio at any given time. This model also allows cash flow projections for effective liquidity management, plus it’s more cost effective and sustainable than it has been in the past owing to advanced data ingestion capabilities and machine learning for repeat tasks. This requirement, coupled with the desire to look through to underlying/indirect exposures, is rising as alternative assets are forming an increasing percentage of portfolios. - Greater customisation of services:
While GP servicing is relatively similar across clients, services required by two LP clients are never the same due to the sheer diversity of their portfolios as well as sub-asset classes, the stages of investments, and the need to benchmark portfolios with comparable frames of reference. - Data structure to be tailored to LP:
The data structure used to service GPs is quite uniform and pre-designed, however because of varying LP service requirements, the fund administration team servicing LPs must be well versed in dealing with and designing multiple data structures. In particular, LPs additionally make use of non-core accounting/financial information and therefore require accountants to work hand-in-hand with data analysts and IT development teams to provide non-financial investment KPIs as well. - The importance of end-to-end personality fit:
LPs operating in the private markets often have a very lean middle/back office set-up since their team manages a single asset owner’s portfolio. The LP’s fund manager tends to perform the dual roles of processing and monitoring as well as making investment decisions. Therefore, successful interaction with such fund managers requires a strong personality fit and a support model that lends itself to being an extension of the fund manager’s team.
Having a single team process the transactions and provide performance analytics helps promote client engagement and enables active query management, which in turn is key to receiving data that is relevant, reliable and accurate to assist with portfolio monitoring as well as decision making.
How IQ-EQ can help
IQ-EQ’s Investor Solutions service offering deftly meets the enhanced needs of LPs by combining the expertise of accountants, performance analysts and client-facing IT developers to provide LPs with a seamless end-to-end service incorporating accounting and back-office services with real-time reporting and analysis. Our experienced accounting teams are able to leverage state-of-the-art technology to address each client’s individual requirements in full. To find out more, please get in touch using my contact details below.