From FT Adviser:
With nearly every major central bank around the world following a trend of raising rates, coupled with extremely low levels of confidence in global equity markets, it is fair to say there are some lean and mean times ahead for institutional investors.
It is therefore no surprise to see, in an attempt to seek out higher yields, institutional asset managers turning their attentions towards private market assets that have the potential to deliver stronger returns on investment.
According to a recent McKinsey report, total assets under management across private markets reached an all-time high of $9.8tn (£8.7tn) as of June 30 2021. The research also shows that private debt is the only asset class to grow fundraising year-on-year since 2011, including the pandemic years.
There is a clear level of concern that fixed income markets are not going to settle any time soon.
Between 2019 and 2020 PE fundraising declined by nearly 20 per cent, while private debt fundraising grew by about 20 per cent.
In addition to this longer-term trend towards private market investing, the past month has seen extreme market turbulence in gilts, largely caused by the new UK government’s “mini” Budget rocking market confidence in the reliability of government debt.
Pensions troubles
The subsequently large margin calls on pensions funds that have been employing liability driven investing (LDI) strategies, relying on derivative instruments tied to long-dated sovereign bonds, has taken up many column inches in the financial press.
However, there is a deeper layer to be peeled back on this story, which is continuing to unravel. As a result of the large collateral payments that are being demanded of pension funds by counterparties, many funds are being forced to sell assets in order to raise the cash.
The challenge is that the more demand grows from asset managers to diversify, the more data is required.
The issue is, many of these pension funds have capital tied up in private market assets, including significant amounts of private debt, which they need to get off of their books and converted into liquid cash.
There is a clear level of concern that fixed income markets are not going to settle any time soon, and that due to the derivative instruments that underpin the LDI strategies being employed by countless pension funds, large margin calls are going to continue to roll in.
As a result, pensions funds are scrambling to get illiquid assets off their books, which has presented an opportunity for asset managers looking to invest in private debt. They are being offered cut price deals on private market assets, as reported recently in the Financial Times.
Processing the data
However, the challenge is that the more demand grows from asset managers to diversify, and therefore process private debt assets as part of a varied portfolio, the more data is required. Since private companies, by their very nature, lack public filings, qualitative data is particularly important.
Processing these assets in an efficient way is also key, particularly as rising volumes leads to an even greater strain on reporting processes. The reality is that the operational processes associated with private market assets are very different to the more vanilla assets such as standard stocks or sovereign bonds.
All this means that asset managers need to invest more time to process data and make informed decisions – not easy given the fact that time and money is not easy to come by in the current economic climate.
Institutional asset managers are going to have to continue to look to alternative asset classes to ensure strong returns for investors.
Investment managers simply cannot afford to spend the time building an entirely new platform to manage the vital data underpinning the increase in private market asset interest.
Instead, firms need to find a way to process their traditional assets, alongside alternative assets, on one system in an efficient, effective, and scalable way – and fast, if they want to take advantage of the opportunities currently on offer.
Getting a premium for illiquidity is the primary factor behind the interest in private debt. The macroeconomic environment means that institutional asset managers are going to have to continue to look to alternative asset classes to ensure strong returns for investors, and this trend is not going to go away anytime soon.
It therefore stands to reason that, as private assets become a more intrinsic part of portfolios, the operational strain from a data perspective will increase on those employing more advanced and varied investing strategies.
Unless asset managers can find a way to process this information, they are in danger of letting the private debt boom go bust.
Yann Bloch is vice-president of product management at NeoXam.
