In the finance world, it is a rare day when we don’t hear about automation and technology transforming how operations are conducted. From AI to robots to machine learning and virtual banks – sometimes the future can seem daunting. In wealth management for example, we now have retail access to products which are completely automated – think of Nutmeg and Moneyfarm as two pioneers in the UK.
In alternative assets and specifically in PE and VC, we face a specific set of challenges, which mostly stem from the unique circumstances of each fund, and each deal. Let’s explore a few elements of this:
- Each fund has slightly different terms than another.
- The same investor may demand a specific deliverable for one GP, but drop the same demand for another GP.
- A GP may present a set of common reports to all investors on a quarterly basis, but commit to providing a unique “addendum” for a VIP or cornerstone investor.
- An investor with many investments receives data in different formats at different times.
This variability has meant that in alternative assets, we have a kind of “friction” for which the usually prescribed lubricant is more people to do manual tasks. Automation remains largely a desired outcome rather than a reality for many people. However, one doesn’t have to look very deeply to see that there is much more that is similar between one fund and the next, than what makes them different. Take some common features of all funds and PE/VC investment:
- Management fee. All GPs charge some sort of management fee.
- Carried interest and hurdle. All funds have similar but different arrangements.
- Reporting. All funds have a required reporting frequency even if the content is not prescribed beyond a basic level.
- Performance measurement. All GPs measure investment returns using multiples and a time-weighted return such as IRR. These are bundled historically as a GP’s “track record”.
- Accounting principles. Most funds report their financial accounts using IFRS or one of the GAAPs and are audited under the same principle.
In alternative assets, we are much quicker to accept the status quo of using spreadsheets and flat files to transfer data, with a leniency that we would not accept in other areas of life. For example, in e-commerce, who would buy from a supplier who required you to enter your payment details every time you made a purchase? Why then, given that there is more that unites us than divides, are we so accepting of lengthy SLAs for common items such as a quarterly report? The short answer is that it shouldn’t.
When Linnovate Partners was founded in 2016, we set out our operating infrastructure to include maximum automation at the very heart of the business. With common calculations like management fee and carried interest, calculation engines were built and harnessed so that the bulk of manual processing for these workflows have been automated – but without sacrificing internal controls such as maker/checker, or quality.
Founder and CEO Henry Lin says: “I am always challenging my design teams to reduce the number of keystrokes and mouse clicks. If it can be done with one less stroke or click, then do it that way. This isn’t an idle comment – the direction in which the alternative assets industry is moving means that our clients will be facing more regulation and compliance, more reporting requirements, and more ad hoc requests. Soon enough, these kinds of requests will be found in DDQs for new fund raising, and GPs unable to comply will start losing commitments. Manual handling is simply not an option for the future.
“Linnovate Partners’ commitment to automation extends to technological advancement – our vision is for an integrated ecosystem where all parties to a private transaction are able to communicate and exchange data seamlessly. This has been our vision from day one, and we won’t rest until we achieve that.”
Milly Hung, one of the Senior Managers at Linnovate Partners is based in our Hong Kong headquarters. Demonstrating how automation helps with scale, Hung said: “The investment in automation and technology at Linnovate Partners allows our teams to not only deliver results much faster, but we are actually preparing our clients for the next wave of investor relations. We recognise that in the future, investment managers will be expected to deliver a whole raft of new reporting and analytics, and we are very well placed to help them achieve this.
“For example, think of a typical reporting workflow for an ad hoc request: a GP client would have to call the administrator or servicer, and after some time, a report would be prepared. At Linnovate Partners, our clients have direct access to a suite of ready made dashboards which are connected to centralised, live data in our operational systems – this is where our focus on automation really hits home. For many of our clients, looking at stale data is not an option.”
Linnovate Partners has automated over 80% of manual activities associated with fund and investment operations – what this has meant is that our teams of analysts, freed from manual tasks, are able to focus on answering more complex client queries and delivering better, more customised service. Illustrating this, Vicky Tsang, one of the Senior Managers at Linnovate Partners, makes two points about our infrastructure. Says Tsang: “Our high degree of operational automation means that we need less time to do the normal tasks: for example, dispatching investor correspondence is automated, as are updates to contact details. Financial statements are updated by direct data connections, having had automatic integrity checks applied – so the chance for human error is minimised.
“Another key point is that the lessening of manual tasks has allowed our teams to provide more value to our service. For example, we are now able to deliver much more scope to our portfolio monitoring service – we can help analyse the data that is collected and identify hot spots and trends.”
Automation doesn’t just help us to deliver a deeper and more personalised service for our clients. On the HR front, it enables us to attract talent from different locations, yet work on the same clients. It helps us to distribute workloads, knowing that when assigning cases, that there isn’t a massive knot of manual work for any one person to do. For quality control, our automated processing means less human error and greater traceability and transparency.
In the media in general, automation is frequently expressed from a prism of replacing real people. We would challenge the simplicity of that argument, and prefer to instead think of empowerment – by which people are enabled to have a richer professional life, harnessing human creativity to help clients think “outside the box”, develop more intuitive processes with which to handle investment management, and seek creative solutions to the problems of tomorrow.
Author: Redmond Lee