Guillaume Fiastre of Taliance looks at why data management is so important in the new regulatory world for alternative investments.
The alternative investment industry is expanding fast. Firms previously not engaged with alternative investments are migrating into private equity and real estate. Those seasoned in these asset classes are fine-tuning their definitions by adopting classes such as infrastructure, rather than blending it with real estate, and diversifying into real assets such as timber, agriculture and energy.
Yet, in line with this market growth, the sector has been coming under increased scrutiny. Traditional alternative investments have focused on annual or semi-annual reporting. But we are seeing more detailed and frequent reporting cycles.
This is a challenge for firms who struggle to gather and distill all the pertinent information in their current reporting cycles and have historically not received or kept information at a granular level.
At the same time, financial instability and investors’ demands are driving governments around the world to develop and impose regulations on the industry.
Passage of the Alternative Investment Fund Managers Directive (AIFMD) and other regulations is having a direct impact on real estate investment managers. Regulations are driving substantial change across the alternative investment sector. Funds will require significant changes in business models and supporting systems in order to comply with regulations and meet investors’ demands.
PREPARING FOR CHANGE
In this new regulatory environment, most investment businesses should be prioritising improving their data management systems. Implementing the best possible solutions in this area is becoming increasingly urgent.
The new and emerging regulatory schemes are unified by the drive to provide investors, and other stakeholders, with better shock testing, security, analysis and transparency. Indeed, up-to-date reporting based on a firm foundation of credible data will soon be a necessity. It will be a challenge for all businesses in the sector but particularly for those organisations that fail to update their data management systems.
At the same time, the need for new technology is being driven by the wide-ranging demands for disclosure of different kinds of data in the various regulatory acts. The AIFMD, for example, requires alternative investment fund managers to make available certain information to investors before they invest in an alternative fund. The European Market Infrastructure Regulation is driving increased transparency through reporting of trades in over-the-counter derivatives in the EU to central data centres.
DATA MANAGING FIRST
Putting in place a strong focus on data management is the critical first step in order to consolidate the store of data and provide confidence in the quality of data.
It is important to stress that data management is not a question of technological solutions, important though they are, it is also vital to put the right processes in place inside the business.
Businesses should look to deliver this potent combination by drawing on the help and assistance of IT support but it is important that the business leads this data management process and ensures that data quality is up to scratch because they are clearly best placed to understand the underlying information.
Once the information is centralised and easily accessible, it is important to have business solutions that will enable the investment managers and asset managers to build reporting and analytics capability; to run “what if” scenarios; and to access all the forecasting they need to support their strategic objectives.
It is at this stage that they need to have a second level of tools – business software and solutions – that enable the business teams to build the right analytics capability for the modern environment – and to finally eliminate the need to rely on an old-fashioned spreadsheet-based approach.
Increasingly, it is clear that spreadsheets are no longer going to cut it as an analysis and reporting tool in this environment – and there are several key reasons why, such as their inherent insecurity at an enterprise level. Other than basic password restrictions, users have little control over who opens their spreadsheets and what changes they make.
Typically, property managers input data into spreadsheets before sending them up to asset managers, fund managers and other levels of the management structure. At each stage, versions are also distributed sideways for more data to be added, amended or removed.
The opportunities for re-keying, and mis-keying, are huge and, because of these changes, it can take weeks for the data to flow from a property manager’s spreadsheet to an investor report – by which time it is already out-of-date. With the right kinds of centralised database system, coupled, of course, with efficient data warehouse and data management tools and an approach that delivers high-quality data you can get the results you need.
You can be always connected to underlying data.
The re-keying of data is always going to be a messy environment – it is a last resort, and not a task that people relish.
But, it is a common process with spreadsheets and PDFs, because the data is not structured, making it impossible for figures to flow easily from one file to the next.
With a centralised database system, in contrast, data is only ever keyed once.
Another problem with spreadsheets is that it is impossible to tell when elements have been updated.
When you are looking at a financial report or P&L in Excel, you don’t know whether changes were last made yesterday, or the month before.
Unlike centralised database systems, spreadsheets have no reliable method of versioning, but upcoming regulation – in particular AIFMD – will make the tracking of changes mandatory.
Conversely, with a centralised system changes are dynamic, so when one person makes an alteration everyone else can see what they have done and the impact of their changes.
The humble spreadsheet has gained popularity because it can be tailored to a thousand different uses. One of these uses is data modelling, but it is important to understand that spreadsheets have not been developed specifically for this task. Instead, you need to use a tool dedicated to modeling.
For example, spreadsheets do not provide any dimension around time, which proves to be a significant handicap.
Financial modeling is assessing how parameters will evolve over time. And the notion of time does not exist in Excel. So, for example, when you refer to April 2013 in Excel you have to remember that there is a value for it somewhere in column U.
Today, the use of spreadsheets in the real estate industry is widespread, but with new regulations on the horizon, shrewd asset managers and fund managers are now seeing their deficiencies as a threat.
A centralised database system will enable companies to comply with regulation with the least amount of disruption.
Guillaume Fiastre is chief executive officer of Taliance
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