Following the 2008 crisis, regulators around the world started to implement new rules around reporting and transparency, such as the EU’s Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive (MiFID II). These new compliance obligations significantly increased the administrative burdens of fund managers.
At the same time, shaken investors increased their scrutiny. Whereas previously they may have sat back and checked their investments on an infrequent or ad hoc basis, now they started to follow them far more closely, becoming more knowledgeable in the process.
As a result of these drivers, fund managers and administrators found themselves on the receiving end of an increased demand for information. Both regulators and investors demanded more data and expected it to be delivered at speed and accessibly. This shift towards data and digitalisation continues to transform the funds industry.
As Scott Kraemer, Managing Director, Alternative Investments, North America explains: “There’s certainly a drive for all parties in transactions to get access to digital data, whether you’re a fund manager or asset manager, service provider or regulatory agent involved in that transaction. You're looking for certain information, and the digitalisation of data is the only way that’s going to be accommodated.”
The investment imperative
As far as investors are concerned, transparency is extremely important in any transaction these days, and the speed of getting data to parties is paramount.
“Investors want the ability to access their data on their own terms and have it at their fingertips, so they can make informed investment decisions,” explains Gulsey Torenli, Director, Alternative Investments. “This has really driven the shift towards dashboards. What’s more, accessing that data needs to be agile, from mobile devices, laptops, iPads and the like.”
This data-driven approach means investors and fund managers can analyse investments against each other, check historical financial performance and access fund information and characteristics. Torenli highlights the following as the kinds of data investors want access to: contributions, distributions, management fees, capital call notices and fund expenses.
Digital access to these types of data proved critical during 2020, as Covid-19 took a tragic toll around the world. “The pandemic made us realise that accessibility is super-important,” says Onno Bouwmeister, Global Sector Head, Private Equity. “Now we realise that remote working is relatively easy, that may well set a new agenda with regard to digitalisation.”
Torenli concurs with Bouwmeister, saying the pandemic has only accelerated the shift towards digitalisation. “Investors and fund managers are going to want increased capabilities and functionality, such as being able to access real-time or near-real-time data and the ability to slice and dice the data in a way they want,” she says. “They are going to want digital repositories where they can access documentation. And they will expect all of this in one location, with multi-factor authentications, so they can access it easily and securely.”
As much as providing data to investors is critical, so is the information fund managers must send tax authorities and regulators. Many of these bodies around the world have implemented technology to speed up processes and are now demanding data in shorter timeframes than ever before.
Indeed, it could be argued that authorities are actually further ahead on the tech curve than many fund managers, because they have actively committed to transforming their technology.
For fund managers, the added challenge here is that rules are implemented on a local basis and can vary significantly by country. This makes compliance a massive challenge. Fund managers must ensure their technology is compatible with the technology of relevant authorities so they provide the required information in the correct form.
Failure to provide this information correctly and on time may leave managers open to penalties — and authorities are increasing their scrutiny. “There are audits being done for private equity funds that weren’t happening before,” says Torenli. “In the US, you have private funds that are registered with the SEC and are no different than a publicly traded company. The SEC is not holding back and is making examples of some private equity funds that fail to follow these processes, procedures and controls.”
The pressure to meet these demands is sure to grow, and digitalisation is the only way forward.
2021 and beyond
Digitalisation is becoming faster, smarter and more prolific, in part to accommodate our increasingly complex and demanding global regulatory landscape. For instance, coming EU regulations that promote sustainable finance will directly affect environmental, social and governance (ESG) funds by changing how fund managers must provide data to both regulators and investors.
It’s important to note, however, that all these changes aren’t negative from a fund manager’s perspective. Indeed, Bouwmeister believes that in a dynamic compliance landscape there are opportunities for managers in the ESG space to create their own data infrastructure, as there are currently no standardised reporting packages.
What’s more, the next few years are likely to see an increased use of advanced technology to streamline processes and more rigorously interrogate data. “I expect that there will be a real increase in the use of business intelligence tools and analytics tools that can sit on top of the data and provide insight and comparative analytics in a relatively streamlined and very much visualised fashion,” says Kraemer.
He also highlights technology — such as robotic process automation, or RPA — that can automate low-value, high-volume tasks such as day-to-day accounting processes. “Then you have things like optical character recognition with some artificial intelligence sitting on top of it. All of these are real things that are happening right now,” he says.
“These are all tools basically being used to take advantage of data that's in the market, to connect the dots, reduce cost and to ensure that there is visibility and transparency into the entire process.”
In such a fast-moving environment, there are opportunities for fund managers who are progressive and willing to take advantage of the latest technology to improve their systems. This approach provides more time to focus on high-value work. It’s clear, moreover, that as we move past the pandemic, standing still with old processes and technologies won’t be an option.
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