15 minute read
Digital evolution
Words:
Imogen Rowland
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Five leaders from across the fund management field share their experiences of how digital advances have shaped the sector in recent years – and what further digital development might mean for operating models, risk management, analytics and transparency in future
THE DIRECTOR OF FUNDS: RICHARD HANSFORD, OCORIAN
The 2008 financial crisis triggered a huge shift in investors’ appetites. All of a sudden there was a huge demand for robust, scalable technology and systems to support fund structures and their underlying investment activity.
Since then, there has been a steady movement towards what can be added to that capability, providing end-to-end solutions to clients in a digitised format.
Having solid institutional technology is now a must for fund management. Clients want on-demand access to granular information, and expect us to continue to deploy and develop technology around our administration platforms to streamline data flows from the asset, up through the structure and then back to the investors and the general partner themselves.
Given the increase in regulation and investor scrutiny, it’s only going to continue growing in importance.
As a provider, Ocorian embraced this shift towards digital technology very early, so despite the challenges caused by Covid-19, moving to a decentralised way of working was a relatively straightforward exercise for us.
But in future, the challenge firms will have is that clients will want to use these digital technologies in different ways. So having an agile platform is really important to ensure that it has the flexibility to adapt to each individual’s requirements.
Among their advantages is the speed of information delivery, but also, importantly, the accuracy of the data.
Using dedicated smart technology helps us to expedite processes and enables our team to spend more time actually talking to the client – understanding what they’re up to, what their plans are for the next quarters, industry trends that may be impacting their development – and analysing the information rather than actually keying it all in.
Essentially, going digital has changed the dynamic, so we can provide more of a partnership mentality and become an extension of their own operational team.
Going forward, while it’s important for companies to have a roadmap, the most
important thing is that it must always be evolving. Technology is not standing still: nor should your technology strategy.
THE INVESTMENT STRATEGIST: RUSSELL NEWTON, COINSHARES
My business partner Danny Masters and I have always been very pro-digital. After working together as oil traders, we set up our own hedge fund in the commodities space.
Then, 10 years ago we moved the business to Jersey and began to look for inspiration for a new venture.
Danny stumbled across the Satoshi Nakamoto white paper and saw that Bitcoin looked very much like some of the areas we were already trading in.
It had limited supply, it was likely to be quite volatile, and it sometimes felt like it was a currency, while at other times it behaved more like a store of value or a commodity.
We realised that there was a potential opportunity here to be at the bleeding edge of a new asset class, and what was needed was a way for investors who were curious to work with a trusted partner who was going to take care of all the complicated stuff.
So, we approached the Jersey Financial Services Commission and said we wanted to be the world’s first regulated Bitcoin hedge fund.
It quite bravely agreed to run with it. Today, we have broadened out and find ourselves actively trading again, using highly automated trading systems to provide liquidity to customers alongside a corporate ventures arm.
The digitisation of this industry is undoubtably a good thing. A lot of companies now are not really even flagging that something is powered by a cryptographic protocol, or utilises cryptocurrency – they’re simply highlighting to their customers that it’s
better, faster and cheaper. But we’ve got to get the regulators on board too, which will involve letting go of old, trusted methods.
There’s an adoption curve: you need buy-in from multiple different sectors – your regulator, your customers, your compliance department – and in financial services it can be incredibly tricky to implement solutions that could very clearly save hundreds of millions of dollars for large institutions.
However, together with other, broader blockchain uses – such as the introduction of zero knowledge proofs – digitisation will make the industry safer as well as more efficient and profitable in the long term.
THE DIGITAL PIONEER: MARTIN KEELAGHER, AGILE AUTOMATIONS
Fund management is an innovative sector, and we have seen a lot of investment funds already using robotics and algorithms for their trading portfolios, embracing machine learning. There’s also the potential to offer new tools that could help active investors outperform the traditional indexes.
But that’s just the tip of the iceberg. Look at the things we help with – bespoke robotic process automations, robotic desktop automation, artifical intelligence and machine learning, creating purposebuilt automations for our clients to meet their specific needs. That includes everything from automating administrative processes to completely overhauling old, antiquated systems.
The whole fund management space has changed dramatically over the past 10 years. Since the crash in 2008, regulations and due diligence have rightly ramped up, and this growth in the risk and governance space has massive cost implications for businesses.
Before this, it was very difficult to see all of a financial institution’s exposures at any one time because they were just so vast, with millions of transactions happening every day.
That’s where technology and robotics really come into play: they can act as a supercharger to individuals, making data instantly available wherever you are in the world in an accurate and meaningful way.
The time that bots can save us is a huge factor. Millennials are now earning more disposable income and are looking to invest – but they want everything instantly. Tech can swoop in and revolutionise a company’s processes quickly, putting them on the cutting edge digitally and enhancing customer service and controls,
thereby ensuring there’s a quick ROI.
One of the big misconceptions about robotics is that it is going to completely replace human roles. But the reality is, most of the time, robotics is simply speeding up processes and ensuring a better level of accuracy and security.
This year’s pandemic has proven how difficult labour-intensive administration roles are, especially when you’re not working in the office.
Our view is that these digital developments unlock the workforce’s potential and allow them to focus in on the high-skill areas where the human touch is irreplaceable, such as relationship building.
But working alongside humans, there’s no doubt that technology has a colossal opportunity to add value to the fund management proposition.
THE CONSULTING DIRECTOR: SIMEON MOSS, DELOITTE
As an industry, fund management has predominantly been relationship-led, and until recently it’s lagged behind the rest of the financial services sector when it comes to digital adoption.
However, recently, and especially throughout the Covid-19 pandemic, we have seen that digital transformation is
very firmly on the agenda. And given that a large number of fund management middle- and back-office processes are delivered through third parties, this transformation will need to happen along the value chain for the full benefits to be realised.
Deloitte’s 2019 European Investment Management Survey demonstrated that while price points and expertise within asset service providers rated highly, around 55% of asset managers were dissatisfied with the digital capabilities of their service providers.
Respondents felt this needed to be a strategic priority going forward and, as such, digital capabilities are becoming a premium criteria and differentiator when selecting a fund administrator.
Now, together with the momentum brought about by Covid-19, there is a critical mass that will put digitisation at the top of people’s agendas, both for productivity reasons and in order to build operational resilience and manage cyber threats. It seems reasonable to suppose that the firms that lead the way with digitisation could not only achieve improved operational efficiencies but also consolidate their lead through future acquisitions or organic growth if asset managers switch service providers. which is more agile and efficient to deliver change and benefits.
For us, it’s an investment that should deliver returns in just two years. We’re also exploring and experiencing further uses for AI and drones.
The bank already uses various forms of AI, but now it will also enable us to review and extract data from prospectuses, ensuring that we always have the latest, most accurate information to hand.
In time, it’ll be a lot easier to read the new standardised blockchain agreements and identify any anomalies, but it’ll also mean investors will be far better informed, not just of their investment status but also the reasons behind any changes.
Even drones are beginning to be utilised by financial institutions. In the property funds space, independent surveyors called a material uncertainty event when the pandemic hit because they couldn’t go out to value properties.
In turn, that meant you couldn’t value the funds, and investors couldn’t make informed decisions about whether to invest or to set up a fund. So in some instances,
And, while many organisations go about digitisation on a piecemeal basis, at Deloitte we advise clients to think big in terms of strategy and roadmap while still implementing in measurable achievable projects.
In the Channel Islands we’re seeing this not only as a development for cost efficiency, but to free up talent to undertake other value-added activities and create new business opportunities.
Becoming cloud-native and considering data is an essential component, and a modern data architecture, will also make a big difference when it comes to new reporting areas such as ESG criteria, because it will enable companies not only to better measure and track their own performance, but also those of their third-party partners.
Likewise, it will better equip companies to manage third-party risks.
The Channel Islands are well positioned to be at the forefront of this digitisation. The size and proximity of the industry here lend the sector to fast adoption, and there is a synergy between businesses, the local government and industry bodies that has helped further progress.
Having a joined-up ecosystem that promotes the digital agenda, in turn makes it attractive for fintech companies
and investment.
drones have been sent out to at least perform external checks and keep that information flowing.
That’s only likely to continue – and develop – in the future. n
Jersey Private Fund: why it’s the simpler, faster, cheaper option
Figures recently released by the Jersey Funds Association show that more than 350 Jersey Private Funds (JPFs) have been established since the launch of the regime in 20171. Simon Page, Hawksford’s Global Head of Fund Services, explains why the JPF has been a success, and how this can be attributed to three factors: simplicity, speed and cost-effectiveness
WHAT IS THE JPF?
As one of the leading international finance centres, Jersey has a thriving funds industry. The JPF is lightly regulated, cost-effective, has no requirement for an audit or prospectus and provides a quickto-market regulatory authorisation process for structures meeting the eligibility criteria.
Through the National Private Placement Regimes (NPPRs), a JPF can be marketed into the European Union for those promoters targeting a European investor base2 .
Its success stems from the fact that it caters specifically for managers who are not targeting a broad investor base, focusing only on professional investors, and thereby allowing a lighter-touch regulatory environment.
The removal of some of the usual regulatory burden results in a streamlined product that can be quick to set up while still having the Jersey hallmark of quality.
The resultant cost efficiencies are obvious, even more so when coupled with the fact that non-EU managers raising funds in Europe can utilise NPPRs – thereby minimising the regulatory impact of AIFMD.
The numbers back this up: there are now more than 350 JPFs and they have contributed significantly to the Jersey fund industry’s record high of fund assets under administration – £346bn in 2019. This included a 19% year-on-year increase in private equity alone1 .
The JPF lends itself to capitalising on the increased allocation of institutional money to alternatives – specifically, PE. But we have also seen particular interest from new-to-market managers, venture capital managers and family offices.
These smaller and newer fund managers often tend to find it easier to work with a regulatory incubator as an Appointed Representative rather than become FCA-authorised in their own right.
The FCA application process can take time, money and effort and it subsequently imposes a significant ongoing cost and compliance burden.
For these managers, then, the JPF and its key selling points marry up perfectly.
COVID IMPACT
By and large, the sector has proved itself to be well equipped to deal with systemic shocks. The investments made over the past 10 years, by managers, regulators and third-party providers, specifically in technology, have allowed the industry to function seamlessly.
We have seen that larger fund managers have been able to weather the storm well. Going into 2020, the levels of dry powder (funds available globally for deployment into VC and PE) were estimated to exceed $1trn.
A proportion of this may have moved to the ‘risk-off’ bucket, but depressed valuations have also driven an increase in transactional and onboarding activity after the initial tremor as the pandemic began.
Although some smaller managers have struggled in these challenging times, both from an investor sentiment perspective and the management of their existing portfolios, we have also seen managers looking at new opportunities in sectors or geographies that have performed well or recovered quickly/managed the crisis.
More frequently, in the VC sector specifically, we have seen that the asymmetric information available to the managers in respect of their existing portfolios has resulted in follow-on investments or new vehicles structured for further investments.
We have seen that good-quality businesses have not been impacted in their ability to secure additional funding and VC managers and their investors have been quick to spot and capitalise on these opportunities.
Investment strategies evolve with the economic landscape, particularly in the closed-ended funds space. What is seen as a challenge for one sector can present opportunities for others.
Liquidity requirements and shifting risk appetite may result in differences in the way in which funds are allocated and invested. Distressed assets may become a buying opportunity.
In the current environment, speed can be a determinant factor for such buying opportunities – and the Jersey Private Fund can be a facilitator.
VERSATILITY AND FLEXIBILITY
Alternatives are often viewed as a safe haven for investors seeking yield in volatile markets and stability of income.
Jersey has already, and rightfully, made its name for expert administration for alternatives. In uncertain times, and particularly the current environment, flexibility is key – as is the ability to be nimble and quick to market.
Thankfully, these attributes are central to the JPF, which has proved itself to be successful in recent years. n
1 Jersey Funds Association, www.jerseyfunds.org/news/jersey-funds-association-chair-delivers-virtual-update 2 Offer document is required where the JPF is an AIF
