Private Equity Real Estate (PERE) investment servicing: data management with underlying assets

By Paul Whapham | 10 August 2018

Beyond the imperative of return on investment, the entire collective enterprise of PERE investment relies upon collaboration between a growing number of parties; investors, investment managers (IM), management companies, asset servicers, custodians. Further, there is the wider circle that includes regulatory bodies, auditors, tax authorities and advisory firms. Collaboration will bring efficiencies for all participants.

Collaboration may not be the first word that springs to mind but that is the reality of the situation. All these parties are engaged in the same common enterprise: meeting the needs and obligations of an investment community, the centre of which is the investor and their investment or allocation.

The primary need of the investor may be ROI. That is the cherry on the cake. The cake – which is by far the largest part of the confection – is the infrastructure that services that investment.

Investors need a smarter way to make allocation decisions

Starting, as we should, with the investors: how do they decide where to place their PERE allocations? Directly or indirectly (through advisors) they research opportunity, weigh those opportunities in terms of their current portfolio, forecast returns and perform due diligence. All these are data-driven processes. One way or another they will help the IM decide which opportunity to pursue.

An IM has to standout in the allocation-making process. Perhaps an IM feels that their track record is unassailable. However, this has to be evidenced and that relies on accurate time-series data presented in a transparent model. Beyond performance over the period of an allocation, the Investor will want to be assured that the IM can service their routine and exceptional information needs on a monthly, quarterly or ad hoc basis. Again, this comes down to timely management of investment data throughout the investment structure and across the participating parties. PERE investment has a growing cast of interested parties.

The challenge of investment and investor servicing

Today, the IM is likely to outsource much of its record keeping directly to an administrator or a management company (captive or independent), and many funds will require a custodian which may, or may not, be the administrator. Now, each of these four participants needs access to a common pool of investment data in order to meet the needs and obligations of the investor and the investment vehicle (often a hierarchy of many sub-vehicles below the primary fund).

By needs, we can say investment servicing and accurate and timely management of cash flows, the more complex challenges of transfer of interest and equalisations during the lifetime of an allocation or investment. By obligations, we can point to due diligence (in its many forms throughout the investment life cycle), and compliance at a regulatory, fiduciary, and investor mandate level.

Regulatory and fiduciary obligations invite new cast members to the party; auditors, regulators, tax authorities.

All these players are serviced by a common pool of investment data surrounding an investment vehicle. PERE investment is a data management issue with assets behind the data.

The reality today is that the many collaborators are not sharing a common pool of investment data. The reality today is that each player has a piece or a sub-set of the pool. Worse, some of the puddles include copies of other puddles. Some of them muddy puddles.

Manual record keeping, multiple copies, no single source for reference data

IMs will outsource most of their record-keeping, but they will often shadow their administrator. Usually they are not sharing the same data but each is maintaining something approaching a copy. The trouble with copies is that they are usually not true copies. Data becomes out of date, changes are not reproduced in both data sets, and there is no common source of reference data. The two or more copies become out-of-synch. The custodian, in the meantime, is working off a completely separate set of data, usually entered and maintained manually, often in a spreadsheet.

Here is a picture of fragmentation of the common pool of data, creating the image of puddles and muddy puddles where the duplication of data is not controlled.

The need for efficiency, the need for collaboration between the parties

Fragmentation of data is the single biggest obstacle to efficiency in the PERE sector.

If administrators, management companies (mancos), and custodians want to scale their businesses without a linear increase in manpower and office infrastructure then they need to accept that data fragmentation has to be eliminated at every opportunity. If IMs wish to service their Investors with timely reporting, then they need to work with asset servicers who can integrate with their business processes.

Ultimately, this means all parties sharing the same common pool of data. This is a data management problem. The joint-enterprise of investment management needs a data model to support an extended organisation – including all participating parties.

This core issue brings other challenges. Data segregation, to protect the privacy of participating parties but at the same time making data available to those who need to perform their functions. Data security, to protect the overall privacy of the community and its data. Usability or user experience, since we are no longer considering one type of user behaviour, there are many stakeholders (some will be light, irregular users while some will have daily interaction with a shared systems platform).

Above all, it concerns senior stakeholders – the COOs and CxOs of all parties. They will, in time, recognise that the only way to reduce the cost of asset and investor servicing is to build asset and investor services on a common data pool. The pool shared by all participants.

That means a data model and systems architecture that supports collaboration across the traditional boundaries of participating parties in the collaborative enterprise of PERE investment servicing.

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