With allocations to private markets on the rise, asset owners are increasingly looking to co-investments and direct investments as a means to obtain exposure to attractive assets without the fee burden of a fund of fund structure. While the returns can be lucrative, the pressure is on operations functions to keep up to speed.

At the recent 2nd Private Markets Summit in Sydney, a panel of industry experts discussed the practicalities of ‘moving up the value chain.’

“Once you branch out, the complexity increases exponentially,” Enrique Gonzalez, Head of Australia and New Zealand at SS&C GlobeOp told the conference.

“If you invest in a fund of funds, you get one price and you get it regularly. Once you go into co- and multiple direct investments, you’re dealing with different data feeds, you’re dealing with multiple valuations, you’ve got tax issues, legal considerations and some of that information does not integrate well into existing IT systems. There’s a fair bit of background work that needs to be done to ensure the whole operational flow and IT infrastructure can support those investments.”

Data is a notoriously hard nut to crack, particularly for funds that are trying to manage assets on a total portfolio basis.

Doug Bell, Director Investment Strategy at New Zealand Super, said that getting an accurate picture of the quality of investments in the private markets space remains a challenge.

“We run a total portfolio approach, which requires us to compare deals across both public and private markets, where the data is highly variable. You’ve got very different sample sizes in there, you’ve got different nature of data biases that are embedded in there, and you’ve ultimately got to find some way to make these data sets more comparable. Calibrating that data correctly, particularly on the private market side, is very hard,” Bell said.

“We try to resolve that through extensive collaboration across the teams. We have a lot of conversations where we compare assets with assets, and asset classes with asset classes. It requires a deep understanding of the specific assets and data sets, as well as the bigger picture, and I’d be pretty cautious about making any high-level assumptions from the data without truly thinking about the accuracy and reliability of the information,” Bell said.

Bias and quality issues are one challenge that’s limiting data comparability. The complete lack of structure around formatting and templates is another.

Those challenges cascade through to the data and operations functions that are tasked with ensuring the data can fit into broader operating models, an exercise that’s so challenging and cumbersome that one panelist said he’d happily outsource the process if he had his time again.

Meanwhile on the technology side, the absence of a one-size-fits-all solution to different private market asset classes further complicates system integration.

Some components, once automated, are relatively easily scalable. Others, such as valuations, where in depth expertise of the asset in question is required, remain a challenge.

At large asset owners such as NZ Super, these considerations are all factored in before deciding to commit to going direct. “The resource implications are pretty significant. When you build up direct exposures and even when co-investing, it takes an enormous amount of time and effort and the gestation period on those deals is very long,” Bell said.

Against that, however, the ability to bypass fees and reap the benefits of direct returns are compelling, with additional benefits including higher quality insights and more sophisticated internal capabilities.

At Australian Retirement Trust, Scott McNally, Senior Portfolio Manager Private Equity, said co-investments have so far outperformed fund investments by a fair margin. “There’s obviously variability within that, but overall the performance of the co-investment portfolio has certainly outperformed,” he said.

SS&C’s Gonzalez said it’s essential that the groundwork is laid before new investments are entered into. “It needs to be implemented before you allocate to a new strategy, so that people that are used to the new strategy, the processes are bedded down, all the data feeds are connected. If you don’t do that you’re building on sand and you will have problems in the future.”