This article is sponsored by JPMorgan Fund Services
What sort of client demands are you seeing in private markets?
Gavin Tobin: Investors are increasing their private market allocations as they seek alpha and search for returns uncorrelated to the public markets. As a result, the private markets are attracting new entrants and existing general partners are scaling up their operations to cater for this activity. Private market investors have a strong demand for enhanced data analytics and reporting to gain better transparency into their investments and performance. Given this trend, we are seeing managers looking to satisfy these requests by leveraging technology for automation, expanding their location footprint and branching out into new strategies, particularly creating products in private debt, infrastructure, renewables and real estate.
Montserrat Serra-Janer: We are also observing interest from family office participants seeking to take a more active role in their investment decision-making process rather than following a passive approach as they traditionally have in the past.
Where are technology developments changing private equity firm operations?
GT: As a provider, we see several areas of focus. The first is data visualization, and we as a firm have invested heavily in tools to help managers and institutional investors transform their data into intelligence. Key dashboards include cashflow forecasting, environmental, social and governance visualization, J-Curve reports and portfolio analytics.
Given prevailing high asset multiples, we’ve observed an increased need for fund managers to perform forecasting analytics to gauge the impact of numerous macro and micro factors on their projected incentive fee calculation. Some private equity firms are looking at blockchain, particularly with regards to tokenization of assets and smart contracts, while artificial intelligence and robotics are being deployed to process non-standard reports and to perform reconciliation processes in the back office.
MSJ: ESG is a major focus area at the JPMorgan enterprise level. In private markets, we’ve devised a solution that displays ESG scores at both the asset and fund levels as well as identifies correlations with returns. We are actively working with our product development team to offer new ESG tools for our clients and their investors.
How is the forecasting capability being used?
GT: It can be used for risk reporting and to help clients conduct “what if” scenario analyses. For example, if there is a market event in which prices come down 10 or 20 percent, what’s the impact to the waterfall calculation and the performance fee for the manager? Similarly, how does an improvement in the market have an impact on performance fees? Essentially, providing the client a forward-looking view into the performance of their funds.
What sort of progress is PE making on cyber-risk?
GT: Cyber-risk remains a hot topic within the industry. General partners should be looking at doing strict due diligence with third-party administrators and service providers. Specifically, they must look at how information is shared on a need-to-know/need-to-do basis as well as where data encryption comes into play. Lastly, they need to be looking at the cybersecurity measures that administrators – who maintain all the books and records – have in place.
MSJ: We have been active in organizing conferences and events to have meaningful and informative discussions around industry trends on cybersecurity with our clients.
“In private markets, we’ve devised a solution that displays ESG scores at both the asset and fund levels”
Our recent insight survey found that while demands on the operational functions of PE firms are increasing, headcount growth is slowing. Does that seem right to you?
GT: Yes, historically the private assets industry has been relatively small compared with other asset strategies, but with increased demand and more institutional investors allocating into the asset class, general partners are really having to evaluate their operations to accommodate this growth.
You can’t continue to throw headcount at the problem; it is really about leveraging automation, being more efficient and scaling the operations. At JPMorgan, we have achieved this by using centralized operations hubs, data driven process engineering and using emerging technologies to automate processes to scale our operations through technology instead of people.
MSJ: We have addressed this issue by adopting a high level of automation across core processes, including reporting and waterfall calculations, and by front-loading operations to allow for greater operational elasticity to absorb new business.
How would you work with a large conventional asset manager moving into PE?
GT: We support the largest asset managers in the world in our securities services business across the entire investment portfolio strategies. We see our traditional asset managers looking to grow their private markets businesses aggressively as they expand their multi-asset solutions capabilities.
We are uniquely positioned to offer a consultative approach in outlining best practices in private markets from our large fund administration practice dedicated to private assets.
We service both the asset owner (limited partner) and asset manager (general partner) segments, giving us a 360-degree view across the investment lifecycle. We provide clients with a blueprint that facilitates the servicing of complex closed-end commitment-based structures across jurisdictions the managers may not have experience in. We help clients put in place a robust and efficient operating model to access the private markets space.
What does an “operating model” comprise in this instance?
MSJ: Our operating model allows us to deploy our technology, specialist staff and processing scale to support the entire investment lifecycle for investing in private markets or fund administration of private market funds. As our operating model is integrated with our clients’ portfolio management systems to capture investment and trade data, we then process the data in our platform and connect to the counterparty to execute the trade or confirm the investment.
Our service delivery model ensures clients and their investors have round-the-clock coverage and event-based data and analytics feeds. Our core services include portfolio administration of limited partner investments, fund accounting, investor reporting and transfer agency solutions across multiple jurisdictions. We deliver the JPMorgan franchise to offer a comprehensive solution set for the client including banking, custody, trading, financing, escrow and depository services.