The Alternative Asset industry has been growing by leaps and bounds over the past few years. Alternate Asset Industry i.e. Private Equity, Venture Capital, Real Estate & Debt Funds, Distressed Debt Funds, Fund of Funds and Family Offices, operate differently both in terms of strategy and investment focus however, they do share a lot of common challenges e.g. instant and easy access to information, data security, compliance, advance reporting and analytics, etc.
Talking particularly about Fund of Funds (FoF) – an FoF is a pooled investment fund that invests in several underlying direct/daughter funds providing the Investors much-desired diversification by exposing them to many funds, and in turn many portfolio companies, with a single commitment. Hence by design, the ecosystem of an FoF is vast and complex and has a larger set of stakeholders – investors of FoF, FoF’s management and investment teams, AIFs and their investors, AIF’s portfolio companies, advisors, intermediaries, etc. Fund of Funds professionals not only need to monitor multiple funds but also be aware of the investment landscape as an Investor. They generally utilise numerous Excel or low-tech applications to manage drawdown and distributions, underlying investment cashflows, valuations of different investments running through various years and quarters as well as investor reporting. However, with so many stakeholders involved the volume of data is difficult to manage in low-tech applications. Investors (either private participants or institutions like pension funds, insurance companies) are becoming more demanding as they have to fulfil their regulatory obligations as well. Technology can help FOFs reach a higher level of operational efficiency, greater compliance, and adherence to new regulations, to support and handle more scrutiny and enquiries from investors and to support a constantly evolving investment strategy.
Over the last few years, technology solutions focused on FoF operations have really evolved. Before such powerful and end-to-end systems existed there used to be multiple silos of unconnected data with no easy way to combine data and deliver unified reporting. The email was the mode of exchanging data, distributing notices, resubmission of requests, etc – which is not only cumbersome but cannot be tracked efficiently at all. Some next-gen solutions are now available as SaaS (Software as a Service) and PaaS(Platform as a Service) and offer capabilities to manage deals, track underlying investments in funds as well as portfolio companies, manage investor relationships, set up complex multilevel fund structures and report investment performance efficiently to the investors. A few FoFs are effectively using SaaS solutions to create an ecosystem wherein the FoF, their investment into other funds (AIFs), and AIF’s further investment into their respective portfolio companies/start-ups are managed on a single consolidated platform – thereby having a single source of truth for every stakeholder.
As FoFs want to migrate to new systems in stages, these solutions are extremely modular as firms can buy (license) the specific services that they need, such as CRM; fundraising; deal management; fund accounting; fund management; reporting; analytics; investor portal; and portfolio management. Along with being modular, in any such solution it is critical to have features like – Mobility (being available on mobiles and tablets), Customized Reports, and Workflows – as the fund managers want to have control over what information is provided to stakeholders and in which format. Providers of these solutions claim them to be very intuitive, easy to use, and require minimal training for fund’s internal teams to use.
Despite the technological advancement, many FoFs have continued to rely on human intellect and effort with minimum support from technology. Concern around the security of their data and integration with other existing systems could be the reasons, however, with new-age technology solutions, more and more FoFs are now recognizing the importance of investing in suitable technology, and the road ahead definitely seems to be far more technology-enabled.
By Ankur Agarwal, Co-founder and CTO, PE Front Office