How Technology Is Serving Alternatives Investment Space

Jackie Bennion Deputy Editor July 13, 2020

How Technology Is Serving Alternatives Investment Space

As Capgemini's latest wealth report has hammered home, technology is your friend, possibly your best friend. In this interview, we speak to one New York firm opening up the data pipes for private markets.

NYC-based financial technology firm Canoe wants to make life easier for institutional investors, allocators and asset servicing firms dealing in the alternatives space. Preqin, the research firm, estimates that the alternative investments market (private equity, hedge funds, property, infrastructure, etc) market will top $14 trillion by 2023. Such investments are often less liquid than listed stocks, or bonds - but investors like the premium for lesser liquidity in these low-yield times.

Canoe, founded in 2013, recently signed a deal with SS&C Technologies to help users speed up and simplify processing alternatives data and closed funding in February led by Hamilton Lane.

Canoe CEO Seth Brotman talked to FWR about the forensics of the technology and how it is revving up analytics and performance for private investors. Brotman says that although alternatives have seen massive growth the last two decades, the corresponding investment in technology to help manage those investments has been relatively tiny, and his company is at the early stage of expanding that.

Wealth managers are sometimes slow to arrive at the tech party so how does your technology specifically help them?
Wealth managers get thousands of PDFs, each month or quarter, about private equity funds, hedge funds, real estate funds, VC funds, etc, that their clients are allocated into. They are spending time and resources going through each one of these PDFs to manually copy and paste data from them. And that data is always different depending on what you invested when and for how long.

We stream that process of getting the docs, understanding what data they are pulling from them, validating that the data is correct, and pushing it where it needs to go - accounting, investment tracking, reporting, and other solutions that wealth managers are using.

Typically, how do you validate that data is correct when it is largely unstructured data not regulated to the same degree as data in public markets?
A number of ways through weaving in business accounting and other logical rules, but the main way is that the head of our technology group as well as myself and other principals, who have worked in the alternative investment space [carry out the checks]. If we get a hedge fund capital account statement that shows things like withdrawals or subscriptions, dollar performance and beginning and end balance, you can systematically identify what the return should be for that period. If that percentage return on that doc does not match the recorded percentage return it indicates that, OK, something here is interesting. We notify this through the interface.

For investment professionals, risk clients, portfolio managers, [the technology] frees up more time to focus on more obscure data that they hadn’t had time before to collect and incorporate.

What sort of obscure data are you talking about?
If you are good size RIA and getting thousands of PDFs on a regular basis, and your team is doing this without technology, they might only pull very basic things: beginning balance, name of investment, who invested, and the day this applies to.

There is a lot of other info they might want to pull, that also goes back through the years: pace of distribution on capital, pace of calls of capital request of funds from the same general partner, info about individual portfolio companies, and digging into those areas.

What we are talking about really is risk and that feels a very different prospect now. How do you see your technology shifting more as a risk tool in the current volatility?
When you say risk, that word means a lot of things to a lot of different people. We focus on allowing our clients better tooling to build up the necessary data to help them make better decisions. Some of that revolves around them understanding their liquidity in their portfolio. Some of it comes from exposure, how much leverage they have, and which industry/sectors they are exposed to that can affect investment decisions; and some of it comes down to outstanding commitments and looking at the funds they have exposure to.

How is it used in secondary markets?
We have a number of clients focused on this space. They are going out to the market and looking for private equity, hedge fund, and other illiquids in the alternatives space and they are willing to trade liquidity for investors who want to transfer their outstanding commitments to these groups. So using technology like ours in that instance helps them assess the risk of a pool of illiquid investments that they are buying on the secondary market to try and understand whether it is additive to their portfolio and worth "quote unquote” the risk of making an offer on the portfolio.

Given the last few months of turmoil, what do managers want to see more of in your technology?
It is licensed to clients so they use it at their discretion. But I’d say the highest-level example I can think of about what they want from the technology is the need to have data to run more sophisticated accounting, portfolio reporting, analytics, and investment tracking. They want the ability to populate those systems with data faster, more accurately, and from a smooth workflow standpoint. What the technology is doing is going from unstructured PDF docs to data and data to knowledge in short order; and that last knowledge piece is about systematically and cleanly transforming that data downstream for wealth managers to slice and dice and visualize to clients.

Who does the analysis?
We work with some of the biggest third-party systems in the world that focus on alternatives and portfolio managers and our tech seamlessly feeds data into their platforms.

If data has been flagged up but still looks interesting what do you do with it in your own workflow?
The data has different gradations of validation. Ultimately the user, the investment pro or analyst, is an expert in the fund and the data. The client determines through the interface what this data means?  They can then go to a general partner to ask about it and get it corrected.

This may be a broad question but what do you think of the private market and how it is doing due diligence can teach public markets? I ask because there is opacity in private markets about how companies are evaluated. Private equity is seen as much more cloak and dagger. As someone in the trenches on the technology side, what are you providing for private allocators that equity markets perhaps aren’t getting?
I’m hesitating because it is not my expertise. What I would say in private market and private investments, to your point that it can be opaque, is that it is important to try and gather as much info as possible and evaluate data the best you can.

You never have perfect information. This may be conjecture but on the public side there is vastly more transparency in information and I think sometimes people conflate that with certainty, and maybe that’s the challenge.

On the private side, the best investors I’ve been associated with are always working with a pretty substantial margin of error in certainty to maximize the likelihood of an investment not underperforming expectations. It all comes down to trying to get high-quality impactful data organized for effective decision-making beyond conjecture and guessing.

How much interest has there been in the sector on beefing up on sustainability and collecting more data and analysis on that side for alternatives allocators? I am talking more about ESG equivalents and where they are on the spectrum for measuring performance. COVID-19 has magnified a shift to ESG considerations being inseparable from financial returns. So what's the mindset among private allocators of where such data fits?
It is not very easy to say from my seat. But clients are able to identify data points they would like to collect and systematically grab them. I think there are two paths: we focus on common recurring documents and information that is coming to an allocator of alternatives that then frees up time to look at other less-regimented, less-regular data that is a little bit more ad hoc. With ESG evaluations that are attempting to measure impact versus just return, it really is going to be on a wealth manager by wealth manager basis and a function of the data that is provided by individual funds investing in that space.

Do you have many competitors at this point?
We don’t. What we are doing is something that is relatively new. And what I mean by that is the combination of in-depth hands-on experience of alternative investment with the most innovative data gathering techniques for unstructured documents and combining them to be the focus is very unusual.

Our prospects and clients think what we are doing is extremely impactful and important for the business. We often get the comment that people are just happy there is finally a solution addressing this. But most of the competition for us is really just trying to explain to people that the technology and expertise is available now, we have built it and been doing this since 2013. This includes a whole host of intelligence put into the actual coding but also literal intelligence with regard to machine learning, AI, natural language processing and special recognition, and the more documents the system sees the smarter it gets. All that is built into the offering today, and helps your overworked middle and back office.

Where do you see this scaling then? Who are you targeting that you haven’t attracted already?
We have brought in representatives across most groups. So instituional investors, allocators, asset servicing firms. That means the RIA or wealth manager, the fund to funds, the buy-side investment consultant. It also means the multi-family office, the SFO, the custodian, the fund-to-fund administrator. We have representative clients in all of those areas.

From here it is a matter of accelerating and continuing to grow those relationships that we have as well as expand throughout the universe. The amount of growth in alternatives investments has been massive over the last two decades and the corresponding investment in technology to help manage alternative investments has been relatively tiny, and we are at the early stage of that.

What data infrastructure you see in the public markets we are doing that for privates and that is going to be super influential and helpful for all of the technology firms that are going to be coming to market to provide enhanced porting portfolio analytics, accounting, risk management, and investment.

Yes because you need competition to grow the market…
You want to say no to that but the answer is yes. If this is a good idea, other people are going to enter the market and when that happens we will compete with the best of them, and will be the best of them, because we’ve been doing this now for a long time.

Are you seeing more appetite for your product in one region over another? I am talking actual geography.
It is an interesting question. We are still so concentrated in the financial centers, so East Coast, West Coast in the States. From a wealth management and RIA standpoint, we have seen some take up in the Midwest. In Europe, we just recently had one of our newest clients come on board from Zurich, and I was actually on a call earlier where they were saying Europe is opening up again. Switzerland in particular, we have seen a pick up there in terms of interest. Much of the US is a little bit behind. It is possible we might see acceleration in Europe over the next few months. As people have gotten used to working remotely, it seems that we are just trying to keep up with demand from wherever it is globally.

Any thoughts on Asia?
Nothing explicit to share, we are having conversations over there, but most business is in Europe and the US.

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