At a time when margins are down, performance is under pressure, global regulation is driving up costs and fundraising competition is fierce, alternative fund managers need to be looking at operational and technology transformation as a means to differentiate their offerings and boost the bottom line. In this environment, the case for outsourcing is increasingly compelling for firms to offload their IT burdens and reduce the risks posed by legacy system constraints.
Those were among the chief observations from a panel of alternative investment veterans at SS&C Deliver, our annual client conference held last month in Orlando Florida. KPMG’s Managing Director of Alternative Investments John Budzyna led the discussion with Michael Fastert of TIG Advisors and Daniel Nikci of Applied Fund Solutions. Together, they took stock of current trends in the alternative investment space and what they might foreshadow for the future.
In a real-time poll of the audience during the session, attendees cited performance and fee pressures as the strongest headwinds facing alternative managers today, with operational transformation also high among concerns. While fund firms may agree on the need to update their technology platforms, it comes at a cost—particularly for established firms whose older platforms make change difficult. Emerging firms, in contrast, can get a jump start by adopting new technologies out of the gate.
In response to another poll question, the audience acknowledged that as challenging as technological change may be, it also represents an opportunity. Operational agility is the key to serving investors looking for broader diversification among different asset classes and fund types. Firms are looking to leverage artificial intelligence and robotic process automation (RPA) in their back- and middle-office operations. And more firms are trying to incorporate alternative data in their investment research in the search for alpha. Adoption of these emerging technologies requires a new set of skills, and fund firms find themselves in competition with technology companies for quantitative and data science talent.
This further reinforces the case for outsourcing, since service and technology partners can take on the responsibility of upgrading and maintaining systems and spread out the cost among several client firms. As Budzyna put it, firms should “outsource everything, then take back what you need.” Outsourcing is a way to gain the scale and flexibility the industry needs, he said, and a way for emerging firms to take advantage of institutional-caliber solutions. The good news for fund managers is that the number of service providers in the market is growing, leading to pricing competition. Outsourcing does not eliminate the need for in-house operational expertise, but it does change the nature of work from task performance to oversight and management of service provider relationships.
The session closed with a look at the pressures fund managers face in raising capital. Firms will be challenged to differentiate themselves while answering increasing investor demand for transparency and lower fees. Managers must be able to convince investors they have a long-term vision. Firms must be sure they have the resources to devote to due diligence inquiries, investor relations and communications. Time spent responding to inquiries and proactively informing investors is bound to get longer, not shorter—but should pay dividends for firms that can develop the necessary skills in these areas.