6 June 2023 - Good data management can streamline operations, improve risk management and help firms differentiate themselves from their peers, says Sam Metland, Executive Vice President & Head of Private Equity Product, Citco (UK) Limited.
How are firms approaching data management today and how has this changed over recent years?
We are seeing data management practices improve quite rapidly. Today’s data leaders have taken huge strides forward and demonstrated the commercial and operational value of good data management. Having seen how the most sophisticated data managers in the industry have got there, other firms are now trying to work out how they can apply this to their own organisations.
The larger firms are tending to lead here, although they often face some challenges in dealing with legacy systems and having to change processes, so this takes some adjustment. Newer, younger firms in comparison are finding this much more straightforward because they are building from scratch. The underlying technology has changed so much in the past 10 years, making it simpler today to build out the infrastructure. The cloud, for example, has made it much easier and cheaper to buy and deploy software that is tailored to the private markets. Firms now have a reasonable choice in the tools and systems they can adopt – that wasn’t always the case.
What kinds of pain points are firms trying to solve using new data management systems?
Asset universe data is a big area. If you invest in a particular region or industry, you are often faced with a lot of disparate information you need to gather to make an effective investment decision. In the past, you might have relied on a team of analysts to find, collate and organise that data to support your investment case. It’s now possible to bring all this together across different universes using mapping tools and present it in a usable format.
Another is investor relations. Investors require so much information on fund performance, underlying company performance, ESG reporting and so on. Having strong data management systems allows firms to provide deep, accurate and timely information to investors in a slick and user-friendly way. Many clients want to deliver more information more quickly to their investors and we are starting to see the traditional 45-day reporting lag at the end of each quarter being questioned. Overall, firms are increasingly seeing good data management as a leading differentiator.
How else might data management offer firms points of differentiation?
Firms that can manage data effectively have significant operational advantages. In fundraising, for example, it no longer needs to take up to a year to reach first, second and third closes. Historically, issues such as negotiating key terms or sorting out side letters have held this up. Yet firms know in advance the main points that re-upping investors will want to work through and if you manage the data required for this up-front, you can compress closing timelines. Capital calls also no longer need to take 12 to 14 days – with better data on items such as structuring, bank account details and so on, you can reduce the time it takes to receive capital from investors. That faster turnaround can then have a knock-on effect on a firm’s attractiveness in a deal – there are clear commercial benefits.
We will see a snowball effect from this – if firms feel they have missed out on a good deal because they couldn’t move fast enough, they will look to upgrade data management systems to keep up with the competition.
How could data management systems help with the increasing operational complexity of private markets firms?
Just a few years ago, firms were managing funds in one or perhaps two strategies; today, many are becoming private markets firms with a whole range of strategies and they are raising capital across asset classes. This all adds complexity and firms need to become data- and systems-led to manage through this. They need reliable and useful data to understand what is happening across different strategies, jurisdictions and in underlying portfolio companies and assets, and to identify and manage risks.
The collapse of Silicon Valley Bank is a good example of how this can play out. As that happened, many different teams had to come together to understand where they might be exposed, including through investor, portfolio company and fund bank accounts, fund credit lines, portfolio company loans, plus various deposit accounts. That one event may have had an impact on a private markets firm in many different ways – making the right, informed decisions will have relied on having all the necessary data available.
Where should firms start when upgrading their data management systems?
Data mastering is where the process should begin - you don’t want to try and do this piecemeal because you will end up with a system that lacks coherence. We’d advise firms to identify the building blocks of their organisation, including investors, assets and funds to create a map of what the organisation does, what is important and why. This can help identify where the data you will need currently sits so you can then approach your vendors with an inventory of what you’d like them to provide. Starting with a plan like this gives firms control – they can outsource functions, but they can’t outsource their responsibility and fiduciary duty.
Firms should decide on standard formats for data and request this from vendors. If information is not standardised, it becomes difficult to automate and use. It’s also important to be clear with vendors that the data they provide must be complete and finished – if you ask for everything, it might not be complete and that makes it less reliable. Many clients we work with also use validation software that undertakes quantitative checks before the data is placed into user-facing systems – that helps to ensure you can trust the data you receive.
The other piece of advice I’d offer is that firms go as granular as they can with the data they request. Even if they don’t need that level of detail today, they may do at some point, so this helps future-proof the organisation and guards against potential issues stemming from a vendor running into problems.
In the past, data migration was time-consuming and cumbersome and used to take months. Nowadays, organisations use data lakes and it’s a process that just requires access permissions to be granted. It can take as little as a couple of hours to do this, provided the data work has been completed.
What will data management in private markets firms be like in the future?
Investors will expect firms to manage data effectively – in five years’ time, it will no longer be sufficient for firms to say they are exploring how to upgrade their data infrastructure.
This will improve data and reporting standards, and could lower operational costs – all of which is good for the industry. If firms can dedicate more time and capital to finding and investing in the best businesses – rather than concentrating on operations – then that’s a great outcome for potential investee companies, fund managers and their investors alike.
First published in Private Equity International’s Fund Services Special Report