Private markets have boomed in recent years. Driven by cheap money and the prospect of strong returns, private assets have outperformed public markets over the long term. While shifts in market conditions driven by persistent inflation and rising rates have slowed deal-making, private market assets still comprise a growing proportion of many managers’ portfolios, by Aman Soni, vice president of Data Strategy at Canoe Intelligence.
While private assets such as companies, real estate, or infrastructure are typically tangible, they are highly complex and difficult to quantify – sometimes involving multiple owners or funding structures, varying levels of liquidity, and income models. Complex assets present challenges to managers – with so many participants involved in private markets, potential exposures in times of market stress can hide beneath the surface and present a significant risk.
This risk was laid bare through the collapse of Silicon Valley Bank (SVB) and other regional banks, sending shockwaves through global markets as institutions around the world assessed the possibility of contagion. The fear for many managers was whether the negative impact of the banks’ collapse could bleed into their portfolios, as these banks played a crucial role in the financing of some private assets. As one domino fell and others threatened to follow, many managers scrambled to assess their exposures – looking for risks to cash flow or possible write-downs.
Tackling a filing cabinet approach in a digital age
Despite the surging popularity of private markets, many of the processes that underpin their operations are highly antiquated – particularly when it comes to data. For those without modern data infrastructure, searching for exposure to SVB was like finding a needle in a haystack – requiring firms to comb through mountains of documentation for references to the troubled banks when every second counted.
As well as revealing systemic weaknesses in the global banking system, the recent crisis has underlined potential risks in private markets. It is clear that decades-old legacy data processes are not fit for purpose in modern firms managing vast swathes of private assets in fast-moving modern markets.
In times of market stress, like during the SVB crisis, there is little time to act. Managers need to have control of their private investment data. The rise in private market assets, on the whole, has not been matched by innovation in data. A filing cabinet approach to data has led to messy, time-consuming data processes. While these systems have worked in the past, the size and complexity of modern portfolios have outgrown these processes.
Across tens of thousands of documents, just one exposure to SVB could have presented significant problems if left unchecked. If not dealt with quickly or missed utterly, these issues could balloon and cause serious damage.
A modern approach for modern markets
While the SVB crisis has been a wake-up call for some managers with large private asset portfolios, others are ahead of the curve. AI and machine learning are the answer to collating and consolidating sprawling documentation. With modern technology, we can seek out data and share from multiple sources in a matter of seconds – whether Excel sheets, PDFs or emails – vastly speeding up a process that would otherwise have taken hundreds of man-hours. During the crisis, managers equipped with these capabilities could act fast under pressure, quickly searching for and identifying their exposures and taking appropriate action where needed.
Knowledge is power in modern markets. Recent events will likely catalyse a greater number of firms to seek more control of their private market data. Doing so is not only important for investors, but for the assets that they own and for the broader functioning and safety of the market. In addition, the longer-term impact of the crisis may see increasing regulation, which may lead to a push for greater transparency in private markets. Staying one step ahead and marshalling private investment data has never been so important.
We are at an inflexion point regarding data and private markets. Private markets have lagged behind their public counterparts, but this is changing. Shifts in market conditions and the increasing sophistication of investors in private markets require automated data processes to match. While the SVB crisis has been a difficult time for market participants, it could influence positive change in the longer term by pushing firms to rethink how they can map their exposures and improve data efficiencies, allowing staff to focus on navigating risk and driving returns.
© FundsTech 2023