Tom Fortin, managing partner and CIO of iCapital Network, has spent most of his career engineering technological solutions for financial companies. At iCapital he oversees administration, investor services and technology. Earlier, Fortin served as Global CIO and head of retail technology at BlackRock, covering retail sales and digital distribution. So, who better to talk about the digitization and democratization of private markets? He took some time with Private Funds CFO to explain the forces pushing change.
Why is getting retail investors access to private markets so difficult?
The reason for this is because the private market system wasn’t designed to handle the volumes that are already running through it, let alone what’s expected from rising demand. It’s ironic but today small investors with $5,000 to invest are easily accommodated with the latest technology for trading in equity markets, yet wealthy investors with $5 million to invest must jump through so many hoops to put money in private markets.
Up to now, private markets have been the domain of big institutional investors and a relatively difficult to access asset for individual investors. High net-worth clients have put no more than 5 percent of their investment dollars into alternative assets.
How does private equity normally handle new investment?
Until recently everything was done manually.
Private funds historically would have only a few dozen institutional investors, each handled individually. The process was done with FedEx boxes, where the investor would receive disclosure documents with yellow stickies indicating where the investor needed to sign. This manual system still exists. In fact, one of the nation’s biggest administrators is the largest recipient of US mail in its home city of Kansas City, Missouri. In that city they run a giant warehouse where they operate what is called the maker/checker system. There the data from the documents gets manually entered by the maker into the system. The work is then reviewed by the checker for any errors. These manual systems tend to be error prone.
I see how increasing volume could put strain on the manual system. Is this what is driving the move to automation?
Yes. The market has exploded. When you are dealing with 1,000, 2,000, even 20,000 investors it is just impossible to manually process so many requests. There are only so many 600-page documents that can be put into FedEx boxes.
As demand has exploded, people are looking to automate the process as much as it is in the mutual fund industry.
Why has iCapital Network focused particularly hard on servicing the independent registered investment advisers?
That’s where the biggest need lies. Independents, when they break away from the big wire houses, have much less access to fund offerings and technology to make the subscription process run smoothly.
Often the solution comes from fund sponsors, which set up white label portals allowing the smaller firm access to the same sophisticated technology as the broker dealers but with a custom-designed front end.
Can you give us an example of how technology makes the system better?
Imagine a wealth manager has an investor with 10 separate PE investments and she calls up her wealth manager wanting to know the state of the K-1s in her funds. The wealth manager would have no option but to say he would call her back and go to work.
That’s because each of 10 investments would typically be in different portals. The wealth manager must go to 10 different sites to gather all the K-1s and assemble them for the investor. It also means that the wealth manager will have to have to remember 10 different passcodes, one for each site.
The solution is to take all those 10 portals or data rooms and load the K-1s from each fund into a single consolidated portal, allowing the wealth adviser to respond immediately to the client.
What we’ve been doing is using technology to help accommodate high volumes and traffic efficiently.
Yet even with all these technological advances, funds still must handle manual subscription applications?
Indeed. Even with the iCapital KKR Private Markets Fund, there are still clients and advisers who prefer to engage via FedEx boxes of materials with wet-ink signatures. The real pressure happens with the back-office administrators and transfer agents bearing the cost of not having a scalable solution. Even with manual subscriptions, technology solutions such as iCapital can limit the downstream paper and provide efficiencies for these firms.
Why are transfers of interest so problematic?
When you’re soliciting for a new fund, ultimately there’s a deadline which people who want to invest work towards. It makes it easier to marshal resources necessary to bring people onboard. Everything works towards a common deadline.
With transfers you don’t have a fixed deadline focusing the effort. So, when a man dies and leaves three heirs in his estate it becomes more difficult. Say two want to continue their investment, and one does not. How do you make sure the heirs qualify as investors, and make sure the investment is suitable for them? Things tend to drift because there is no deadline moving things forward. Staying on top of transfers represents one of the more difficult areas to tackle.
When compared with other asset classes, private investing is not by its nature difficult. What makes it difficult is it has grown so fast and there has never been technology to assist with the efficiencies. Private equity is unique because it has always been a low volume activity that could be handled if you have a few investors. Now because of the demand and working with hundreds or thousands of investors, technology has become necessary. And with the pandemic, the problem of paper and manual signatories has compounded because no one was in the office.