The measurement of private fixed assets
Sustained private capital inflows are putting increasing pressure on operational infrastructure that is struggling to keep pace with investor appetite.
In an environment of low interest rates and an uncertain economic outlook, institutional investors continued to turn to private assets in search of diversification and long-term performance.
Private fixed assets – a category that includes private equity, infrastructure, real estate and private debt funds – now make up more than 10% of an institutional investor’s average portfolio, up from 2-3% a year ago. only a few years old.
This rapid growth shows few signs of slowing down. In 2021, global private equity assets under management surpassed $8 trillion and are expected to reach $13 trillion by 2025, according to Morgan Stanley.
The other side of the coin
While the segment’s breakneck growth has represented a significant opportunity for fund managers, it has also exposed the shortcomings of traditional operating models used to manage unlisted assets.
Internal fund monitoring processes that historically relied on physical paper and spreadsheets are struggling to keep pace with the scale and reporting demands imposed on them by large increases in allocation. This has been reinforced during the pandemic, with internal operating models facing scalability challenges during times of heightened disruption.
In addition, private fixed assets suffer from a lack of standardization in terms of reporting and accessible data needed to perform the detailed and transparent analysis that investors are accustomed to receiving with listed assets.
Support future growth
To truly capitalize on the segment’s rapid growth, fund managers will need operating models that can handle complexity at scale – through automation and industrialized reporting capabilities – and scale quickly into new markets without withdraw resources from the front office. For this reason, outsourcing is becoming more and more attractive.
The unique challenges presented by the asset class leave managers with no choice but to seek out platforms that can accommodate their current and projected growth in private investments.
Gain the power play
With the maturation of the sector, another major development is the increasing digitization of reporting tools for both management companies and investors. In addition to custom reporting capabilities – as well as document management and workflow features to streamline the operating model and digital user experience – quantitative analysis and decision support tools become essential.
To meet this growing need, we took a stake in private equity fintech, Asset-Metrix, to further digitalize our private equity offering.
This partnership will allow us to accelerate the development of industry-leading solutions for unlisted investments, giving clients access to fully digital reporting and analytics capabilities as part of a single integrated service offering.
Integrate ESG considerations
Alongside the broader fund management industry, integrating ESG into the investment process is also rapidly gaining prominence in the private equity sphere. This was confirmed in the latest BNP Paribas Global ESG Survey on ESG integration with a group of 356 institutional investors, representing over $11 trillion in assets under management.
Research has shown that while equities remain the main asset class used to deploy ESG considerations (60%), there is growing ESG awareness within alternative asset classes, particularly private equity.
In fact, 41% of investors are integrating ESG considerations into infrastructure, followed by private equity/debt (38%) and real estate (37%), with asset owners leading the charge versus managers of assets.
Despite the aforementioned challenges with standardized measurement and reporting relating to listed assets, unlisted assets have considerable potential for ESG impact. For example, a majority shareholder in private equity has the ability to influence change within a company and to impose reporting around certain ESG criteria.
Indeed, the role that financial institutions must play in helping investors move capital into investments that deliver positive ESG outcomes cannot be underestimated. The new direction is clear.
Spurred on by mounting pressure from investors and regulators, and stark warnings from the IPCC on the urgency of tackling climate change, the issue will only grow in importance in the months to come.
Karine Litou is Deputy Global Head of Private Capital at BNP Paribas Securities Services.