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Private Market Investing Accelerates as Interest Rates Rise
April 29, 2022 by Scott Kurland
Even as interest rates trend upward and traditional fixed-income investment vehicles reclaim some of their luster, insurers and other investors continue to show interest in private market investing.
There are good reasons for this:
- The opportunity for higher yields and margins.
- The ability to meet sustainable and ESG investment objectives.
- A new vehicle for expansion and diversification of current portfolios.
- Better alignment of long-term assets and cash flows with existing long-term liabilities and maturities.
The economic and social trends and circumstances we are experiencing right now have produced many opportunities for private market investing. The great resignation and shift to remote work have spurred a dearth of urban development. The ongoing pandemic has driven up online shopping and an increase in home internet and data streaming services. In turn, there is a need for more data centers, industrial warehouse distribution centers and transportation/logistics investments, while the global focus on climate change and carbon reduction has created new opportunities for biotech and clean energy infrastructure investments. Yet for investors who are experts in maximizing returns within the institutional space, private market investing comes with a learning curve and technology challenges that are not readily addressed by current traditional investment operations and systems infrastructure.
By their nature, private market investments are typically bespoke deals that come with unique terms and conditions—as such, they don’t scale as efficiently as public investments from an operational perspective. For insurers, in particular, alternative investments also come with specific regulatory reporting requirements—such as NAIC Statutory Reporting on Schedule BA, A, B, etc., and may impact Asset Liability Management (ALM) from the standpoint of liquidity and cash flow constraints. Additionally, private market investments require unique deal expertise and a proprietary deal pipeline, which many insurers may not currently have in-house.
Partnering with third-party investment managers, fund administrators and outsourced investment accounting providers who have access to private market deal flow as well as the right technology and domain expertise can help insurers build a scalable and efficient private market investment strategy.
Specifically regarding technology, look for firms who are using advanced AI technologies such as Natural Language Processing, Optical Character Recognition and Machine Learning. These technologies can streamline and automate the processing of collecting, extracting and processing non-standardized documents and data associated with private market investments in order to drive greater operational scale and efficiency.
In addition to AI technologies, insurers can look to partner with a provider that offers holistic risk management, compliance and performance measurement capabilities across both private and public market investments, which can provide better insights to the investments team as portfolio complexity increases.
As a case in point: at SS&C we are training our AI models to intelligently collect, digitize, read and process hundreds of thousands of capital calls, distributions, rate reset and principal paydown notices from partnerships and agent banks, and then feed this data into our next-generation insurance investment accounting system, Singularity, to update transactions, valuations and cash flows in an efficient and timely manner. This enables our insurance clients to achieve faster and more reliable accounting closes, along with comprehensive financial and regulatory reporting.
Recently, Stan Szczepanik, CPA, and Managing Director of SS&C’s Insurance Solutions group went into greater depth on this topic during an interview with Insurance Investor. You can read the full interview here.
Written by Scott Kurland