Alternative Asset Owners: Building a Comprehensive Investment Strategy

As an alternative asset owner, building a comprehensive investment strategy is crucial to achieving your financial goals. This involves diversifying your portfolio to include a mix of traditional assets like stocks and bonds, as well as alternative assets such as real estate, private equity, and hedge funds.

Alternative asset owners often have a higher risk tolerance and a longer investment horizon, which allows them to take on more aggressive investment strategies. According to a study, 71% of alternative asset owners have a high or very high risk tolerance.

A well-structured investment strategy should include a clear allocation of assets, risk management, and regular portfolio rebalancing. This can help minimize losses and maximize returns over the long term.

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As an alternative asset owner, it's essential to have a comprehensive understanding of the asset types and structures involved in your investments.

Alternative assets span many things, including limited partnerships, co-investments, direct investments, joint ventures, and more.

Ensuring you have a solid grasp of these asset types sets the stage for the operational, technical, and personnel capabilities needed to support your investments.

Private equity, private debt, real estate, infrastructure, equipment, mortgage loans, and other asset securitizations are all part of the mix.

Understanding the nuances of these asset types will help you make informed investment decisions and build a robust investment portfolio.

The scope of your investments is vast and complex, encompassing alternative and private assets such as limited partnerships, co-investments, direct investments, joint ventures, and more.

These assets include private equity, private debt, real estate, infrastructure, equipment, mortgage loans, and other asset securitizations, which require a comprehensive understanding to support an optimized operating model.

Limited partnerships, for instance, are a type of asset that can be part of an investment portfolio.

The investment landscape has undergone significant changes in recent years, with alternative assets gaining prominence in traditional investor portfolios. The 2007-09 financial crisis was a major catalyst for this shift, as investors sought low-correlated assets that could provide diversification, greater alpha, and inflation protection.

Alternative assets have experienced remarkable growth, with the industry expanding from $3 trillion under management in 2003 to $15 trillion in 2019, a 400% increase over 16 years. This growth is expected to continue, with a projected $18 trillion by 2024.

Revenue from alternative assets has also surged, rising from 29% of total revenue in 2003 to 46% in 2019. In 2019, alternative assets generated an estimated $137 billion in revenue, a significant increase from the estimated $30 billion in 2003.

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Staffing and operations are crucial for alternative asset owners. Alternative investing requires specialized investment management capabilities and operational knowledge to support asset types once a deal is executed.

Cutting corners on your staffing model introduces increased operational risks. Alternative asset owners need to invest in staff with sophisticated skillsets to manage nuances in data sourcing, asset set-up, cash processing, and reconciliation.

To build a solid staffing model, you need to focus on the right skillsets. Alternative investing requires specialized investment management capabilities.

Cutting corners on staffing can introduce increased operational risks. This is particularly true for asset types that need sophisticated support once a deal is executed.

Data sourcing, asset set-up, cash processing, and reconciliation are typical functions that require specialized knowledge. These functions have distinct nuances compared to traditional public asset support functions.

SMEs with more advanced skillsets are necessary to navigate these nuances effectively.

Alternative investing requires different operational processes than traditional asset classes, which can be challenging to standardize due to varying counterparty capability maturity.

Traditional asset managers often try to tweak their existing processes to support alternatives, but this approach can lead to gaps in operational control and increased process risk.

Firms that recognize and account for the process differentiation required for alternative investing will be rewarded with a stronger operational control framework.

Designing alternative-specific processes is crucial, as it allows for the use of distinct underlying technology capabilities and specialized Subject Matter Experts (SMEs).

A well-designed technology infrastructure is crucial for alternative asset owners to support their business and operational processes. This means having applications, platforms, and tools designed to handle in-scope alternative asset types.

Manual workarounds like Excel can leave a firm exposed and at risk to scale, while purpose-built solutions can enable more streamlined and automated processes. Solutions that support assets like real estate, private equity, and private loans will help asset managers stay ahead.

Implementing a cohesive, holistic application architecture enables a complete view of portfolios for end clients. Many clients are seeing the benefits of combined alternative and traditional investing strategies, and therefore demanding top-level and drill-down views from a data and performance perspective.

Firms that design and implement a well-thought-out alternatives operating model aligned with their enterprise model will be best positioned to support and scale their business.

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To build a strong and resilient portfolio, it's essential to understand the various asset classes that make up alternative investing.

Mastering the differences between traditional and alternative investments is a crucial step, and learning about key terminology is a great place to start.

Alternative asset classes, such as private equity and real estate, are the building blocks of alternative investing.

These asset classes contribute to building strong and resilient portfolios by providing a mix of income, growth, and diversification.

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Books and records have become a complex reality. Managing multiple versions of the current reality is a significant challenge for asset owners, especially when institutional portfolios add alternatives.

The traditional approach to bookkeeping, where an asset owner had one book of record for an investment portfolio, is no longer sufficient. Custody platforms were built for traditional assets and currencies, but alternatives have always been a difficult proposition.

Asset owners need to consider what segments of the investment mandate are best served by the custodian. They must also decide how many books of record are needed for the organization and who maintains them.

A financial accounting system (G/L) may be required for the investment portfolio, and specialist expertise may be needed for certain strategies. Custodian data can impact core operational workflows and should be integrated in a way that meets the needs of investment professionals, managers, governments, data aggregators, and beneficiaries.

Here are some key considerations for asset owners:

Institutional investors now need data from a vast array of providers, including fund managers, analytics data providers, market data providers, and more.

Traditional assets operations are highly automated, but alternative assets still rely heavily on documents and manual workflows.

It's nearly impossible for asset owners to source, validate, and manage the necessary investment-related data in-house.

Bundling data services and financial software is now common, even among startup software firms, which eases lengthy and expensive integrations.

Managing the avalanche of data from an ever-growing spider web of sources is a significant challenge, and asset owners must carefully choose the right relationships to lighten the burden.

The proliferation of alternative assets has made accurate data provision even more crucial, with asset owners requiring data in a variety of flexible formats across multiple systems.

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Alternative asset classes include Private Equity, Hedge Funds, Real Estate, and Private Debt, with Infrastructure and Energy being other notable options.

The alternative investment cycle can last anywhere from 1 year for Hedge Funds to 7-10 years for Private Equity funds.

Hedge Funds are a type of pooled investment fund that trade relatively liquid assets and can be used as a diversification tool.

Private Equity, Hedge Funds, and other alternative assets have a different trade cycle compared to traditional asset classes.

Regulations like the Volcker rule and AIFMD have impacted the alternative asset space, making data quality and accessibility a significant challenge.

Modern technologies can drive competitive advantage across the value chain by improving investment returns, organizational agility, and providing robust risk management.

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The Snowflake Problem is a reality for many institutional investors, where no two investors are alike in their culture, regulatory/legal frameworks, or structure. This uniqueness makes it challenging to adopt best practices, and instead, requires custom-fitted solutions.

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Each investor's needs are distinct, and staffing constraints can be a major issue, especially for institutions with limited resources. This can lead to tailored relationships with partners and service providers.

In today's diversified portfolio landscape, multi-disciplinary staff with data skills are in high demand. Innovative technology tools and bespoke solution providers are also essential to navigate the complexity of modern portfolios and entity structures.

The complexity of modern portfolios creates an overwhelming paradox of choice for asset owners, where investment operations is a critical function. This involves the manufacturing and curation of disparate data sets that are the lifeblood of pensions, endowments, family offices, and sovereign managers.

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As an alternative asset owner, it's essential to understand the scope of your investments. Alternative and private assets can include limited partnerships, co-investments, direct investments, joint ventures, and more.

These investments can also involve private equity, private debt, real estate, infrastructure, equipment, mortgage loans, and other asset securitizations. Ensuring you have a comprehensive understanding of the asset types and structures is crucial for success.

To support an optimized operating model, you'll need to develop operational, technical, and personnel capabilities that align with your investment goals and strategies.

Alternative and private assets can be complex, spanning limited partnerships, co-investments, direct investments, joint ventures, and more.

These assets include private equity, private debt, real estate, infrastructure, equipment, mortgage loans, and other asset securitizations, which require a deep understanding to support an optimized operating model.

Ensuring you have a comprehensive understanding of the asset types and structures is crucial for operational, technical, and personnel capabilities.

This understanding sets the stage for a well-rounded investment approach that considers multiple factors and strategies.

Navigating the alternative assets market can be overwhelming, especially with unique challenges like administration, data management, and performance reporting.

Northern Trust offers a complete range of solutions to help you stay aligned with changing markets, including support for complex alternative investment strategies and compliance with new regulations.

The alternative assets market is complicated for both asset owners and asset managers, and you need an experienced partner to help you manage data, navigate market trends, and improve processes.

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Northern Trust can assist you in managing data, navigating market trends, and improving processes for alternative asset types, including Hedge Funds, Infrastructure, Private Equity, and Real Estate.

Our experience supporting both asset owners and asset managers allows us to understand and provide solutions for your requirements from multiple perspectives.

Here are some alternative asset types that Northern Trust can support:

Private capital funds are a key part of alternative asset ownership, particularly for private equity investments. Private equity investing involves investing in private, non-listed companies with the aim of bringing about change.

Industry pressures are driving private capital fund managers to seek efficiency and oversight in onboarding and monitoring requirements. This is being addressed through digitization and streamlining of the investor onboarding journey.

Private equity investing offers several advantages, including company-specific selection, intensive due diligence, and active participation in driving the business.

Industry pressures are driving private capital fund managers and their investors to seek greater efficiency and oversight to address complex onboarding and monitoring requirements. This is a significant challenge for both parties, as it can lead to delays and increased costs.

Private capital fund managers are turning to technology to digitize and streamline the investor onboarding journey. By leveraging tools like Fenergo, they can automate many of the manual processes involved in onboarding new investors.

Faster and more efficient onboarding processes benefit both fund managers and investors. It allows fund managers to focus on what matters most - managing their investments - while investors can get up and running more quickly.

Investors can expect a more seamless experience when working with private capital fund managers who have implemented digital onboarding solutions. This can include online portals, automated documentation, and streamlined communication.

By digitizing the onboarding process, private capital fund managers can also improve their ability to monitor and report on investor activity. This helps to ensure that all parties are in compliance with relevant regulations and laws.

Here are some key benefits of digital onboarding in private capital funds:

Private equity investments involve putting money into a private company with the goal of making some kind of change. This can happen at different stages of a company's life cycle.

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Private equity investing can offer some key advantages over investing in public companies. One of these benefits is the ability to choose specific companies to invest in.

Private equity investors often get involved in the day-to-day operations of the companies they invest in. This can be an opportunity to drive growth and make a real impact.

Investing in private equity can also involve holding onto your investment for a longer period of time. This can give you a chance to see the company grow and develop over time.

Private equity investments are just one part of a broader category of alternative and private assets.

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Alternative asset owners have a wide range of options to choose from, and understanding the different asset classes is crucial for building a strong and resilient portfolio.

Private Equity is one of the four primary alternative asset classes, and it can last anywhere from 1 to 7-10 years, making it a long-term investment.

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Hedge Funds are another alternative asset class, known for their short-term investment cycle, often lasting just 1 year.

Real Estate is also a key player in the alternative asset space, offering a unique investment opportunity that can provide steady income and long-term growth.

Private Debt is the fourth primary alternative asset class, providing a source of funding for businesses and individuals.

Infrastructure, energy, and art are some of the other exotic investments that can be included in an alternative asset portfolio, offering a diverse range of opportunities.

The investment cycle for alternative assets can be complex, with multiple stakeholders and a lack of standardization, making it challenging to manage and track investments.

Data quality and accessibility are critical challenges in the alternative asset industry, with many firms struggling to collect and analyze the data they need to make informed investment decisions.

Regulations such as the Volcker rule and the European Union Alternative Investment Fund Managers Directive have increased oversight and added complexity to the alternative asset space.

Firms in the alternative asset industry must adapt quickly to technological changes and new ways of working to stay competitive and take advantage of growth opportunities.

By leveraging modern technologies and improving internal processes, firms can drive competitive advantage, improve investment returns, and enhance customer experience.

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As alternative asset owners, it's essential to understand the benefits of diversifying your portfolio with hedge funds, private equity, and private credit.

These three asset classes provide portfolio diversification, helping to reduce risk and increase potential returns.

By tapping into the growth potential of these asset classes, investors can access new opportunities for their businesses and investments.

Private equity and private credit can also enable financing opportunities for businesses, helping them to grow and expand their operations.

Hedge funds, private equity, and private credit are key components of the alternatives universe, and understanding their benefits can help you make informed investment decisions.

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