Making an impact in private markets, starts with the data

Investment Technology

Making an impact in private markets, starts with the data

Finbourne

Finbourne

25/04/22

Matthew Luff, Head of Partnerships, FINBOURNE Technology

We’ve recently talked about the challenges around demonstrating sustainable goals, from net zero commitments to the next ESG hurdle to hit the market; biodiversity. Much of this focuses on plain vanilla equities and public markets but there is an equal, if not greater opportunity for sustainability to flourish in private markets; including real estate, infrastructure and private equity.

While private markets funds may have been slower to the ESG party in the early days, they have more than made up for any initial lack of enthusiasm, with private markets fund managers increasingly acknowledging the assets they hold have a direct environmental and social impact. Leading the way forward in capital markets, these funds have a chance to make a real difference to the world and indeed the triple bottom line – people, planet and profit – with much more vigour than indirect markets.

Perhaps for this reason, some of the world’s leading pension funds and sovereign wealth funds are turning their attention to private assets, with increasing allocations, year on year. We’re already starting to see investors electing to only back managers that embrace sustainability across their portfolios, but perhaps not only for the obvious reasons you’d think…

The human impact

Last year climate solutions emerged as a separate asset class for the first time and according to New Private Markets we’re likely to see more capital flowing into these strategies as 2022 progresses. Private Equity Wire reports 132 impact funds launched in 2021 alone, raising approximately $20 billion since 2015 (Bloomberg data). And in January of this year, Nordic-based Summa Equity closed its third impact fund – Europe’s largest yet, at EUR2.3 billion –entering into the ‘billion-dollar impact club’ – a prestigious group including (or soon to include) KKR, Bain, Apollo and Apax.

However, as international investors pour money into these strategies, they are increasingly demanding high-quality, transparent, reliable and comparable data from their fund managers on a range of ESG metrics. Some of the largest pension funds, including CalPERS, whose very remit is to plan for their members future, have taken action to ensure investment strategies are aligned with their members’ beliefs; with the introduction of ESG measurement in private equity.

It’s fair to say that sustainability has become a core part of the institutional investors’ psyche and is now cemented in the due diligence they require from their managers. It can significantly impact how much they’re willing to invest, or where there is a lack of transparency; how much they are prepared to drawdown. However, there is also a more human element at play. Private markets offer investors a platform to make their own social impact, with mandates not only reflecting risk appetite and long-term objectives, but also the values of the fund and its stakeholders.

Given this changing investor profile and the current attraction to these assets, private markets managers will need to adapt quickly, not only to satisfy investors with risk-adjusted returns but with  high quality ESG reporting that demonstrably reflects shared values. This is no easy feat particularly when dealing with complex private assets and across difficult-to-measure areas, such as social impact. Defining sustainability metrics and obtaining the necessary data to report on impact and progress will be essential to this effort.

Carrot and stick

If we put the data challenge to the side for a moment, the benefits of demonstrating sustainability prowess should outweigh the challenge. Most private markets managers recognise the direct knock-on effect of sustainable investing on value and returns to investors, and the potential for bigger allocations. What’s more, private markets tend to have longer time horizons and greater influence over their holding companies, which dovetail well with sustainability goals.

But where there’s a carrot, there is sure to be a stick and managers are finding they now have little time to get on board, before it’s too late…

Last year, the introduction of the EU’s Sustainable Finance Disclosure Regulation (SFDR), an initiative to facilitate finance for sustainable growth, became a game-changer for EU-wide funds. Living in a globalised world as we do, these regulations rarely stay ‘local’ for long. The US has already begun to introduce ESG reporting regulations with the launch of the Sustainability Accounting Standards Board (SASB) and the SEC is gunning for reform in the private funds industry, with the introduction of the ESG Risk Alert.

Key to achieving a satisfactory level of ESG and sustainability reporting across private markets will be data – from the sourcing of it, to analysing and delivering insights. To facilitate funds, the IFRS Foundation announced the creation of a new standard-setting board – the International Sustainability Standards Board (ISSB) – to deliver a comprehensive baseline of sustainability related disclosure standards for the industry.

Though these initiatives should help private markets managers, with regulation in full swing, the number of data vendors and providers will no doubt multiply, posing an altogether different problem. Given the plethora of proprietary methodologies and criteria, many managers will have to face the gargantuan task of making sense of all the fragmented data and custom insights, before they can even begin to demonstrate investor due diligence.

This will no doubt be less of an issue for private assets behemoths and large flagship pension funds, who will be able to flex their scale and resources. However, for small-medium private assets managers, and traditional managers moving into private markets, withstanding the tide of regulation and delivering on investor demands will certainly prove a challenge, that could see them sink or swim.

People Vs Technology investment

To date, there has been more of a focus on hiring the right expertise than investing in the right technology. Even as we speak, private markets asset managers are ’locked in battle for talent’ for specialists that can give them the edge over competitors. While specialist resources can absolutely have an impact on a funds’ success, the lack of technology investment has left many managers grappling in the background.

Manual and legacy processes across data acquisition, harmonisation and cleansing, are failing to create a timely or trusted view from which decisions can be made. They also introduce the risk of human error and data breaks that can detrimentally impact not only reporting, but also portfolio decisions.

We believe there is a way forward. Demonstrating sustainability metrics within complex private assets provides a classic use-case for SaaS data management. From real assets such as airports, to comparably measuring energy consumption in real estate, there is a depth of data involved that requires fast-acting technology to work through it.

It’s also important to note that some of this data will get very niche very quickly. It’s no longer just about net zero or carbon neutrality, but as much about the ‘S’ in ESG. Diversity, ethnicity, gender pay gap and board representation are now just as much of an ask from investors.

So how do private markets managers successfully measure and report across such broad and divergent data?

Aggregate, consolidate and translate disparate formats of data

Until now, data lakes and spreadsheets have only provided half-answers when trying to analyse ESG data points for decision making or reporting. It is why we took a fresh look at what managers needed and have re-engineered the data stack of the future.

By adopting an interoperable approach that is compatible with existing ecosystems, you don’t have to rip out everything and start all over again. Fund managers can benefit from a practical solution that de-risks operational change, while delivering a scalable data platform that meets their operational needs. Both now and well into the future.

A cloud-native SaaS platform built with innate financial sense and an extendible data model, enables funds to consolidate disparate sources and differing formats of data in real-time, to quickly understand key metrics. It is the first step to creating an agile process for operational purposes and for investor and regulatory reporting.

This data can be enhanced with tagging and metadata to capture particular ESG and sustainability data points. Combining this with the right entitlements, means that funds can ensure both their organisation and clients can access the data they need to see, when they need it. In this way managers can confidently demonstrate due diligence requirements and secure fresh allocations to fuel growth.

Demonstrate data fidelity to both investors and regulators  

When it comes to ESG reporting, native bitemporality is particularly critical for investment management and enables firms to access their data at any given point in history. This SaaS feature allows firms to demonstrate data fidelity to both investors and regulators, by easily rewinding data and viewing its complete lineage. This can be especially helpful when demonstrating improvements across the portfolio assets.

With an immutable data store in the armoury, private markets managers can achieve a future-proof foundation and achieve the agility needed to respond to evolving market opportunities; including  the one that lays before them today.

Cloud native technology that optimises and scales to the ESG challenge

As the market for ESG data proliferates, a SaaS approach will be crucial for aggregating and consolidating ESG data. Making sense of it all will continue to be the most time consuming challenge. This is where SaaS data management can facilitate greater innovation, to optimise and scale operations in the future.

Working with cloud-native technology means funds can adopt emerging technologies like Natural Language Processing (NLP) to reconcile subjective ESG data from a broad range of vendors and a lack of reporting standardisation. These technologies can also support value creation, where funds can add their own metrics to root out underperforming or undervalued assets.

In summary, an interoperable SaaS approach to data management can make all the difference in supporting private markets managers to understand and access ESG and sustainability data and metrics. However, it requires firms to recognise the changing investor profile and appetite, while also moving away from a sole focus on people and expertise.

By paying attention to technology investment in equal balance, private markets managers will be able to unlock their data potential, empowering their people and processes, in order to meet investor due diligence with greater ease, and deliver against the triple bottom line with greater speed.

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Finbourne

25/04/22

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