Technology has an integral role to play as private markets adapt to the needs and expectations of retail investors and HNWIs, according to Yann Magnan, CEO and co-founder of 73 Strings, a global fintech shaping the future of how illiquid assets are analysed, valued and monitored; and Jonathan Balkin, co-founder and executive director of Lionpoint, a global operational transformation consulting firm.

RD: How must private markets evolve and adapt to address the requirements of retail investors and HNWIs?

Jonathan Balkin: Private markets have historically catered to large, institutional investors, so the industry will need to evolve to address the needs of retail and HNWI investors. 

Enabling accessibility for such investors will require lower investment minimums, simplified processes and user-friendly platforms, which have been a challenge historically. Technology can assist by providing intuitive online platforms that allow investors to research, analyse and invest in private market opportunities with ease. From an operational perspective, firms need technology solutions and operating models that can scale from supporting hundreds to thousands, or perhaps tens of thousands, of investors. 

The digitalisation of a GP’s valuation capabilities will also be an important area to solve. Existing private market investors are used to receiving information much less frequently than the retail and HNWI profile, therefore a monumental shift in the pace of deriving valuations is imminent. The future reporting requirements of new investor classes will not be sustainable without utilising technology. 

Yann Magnan: When GPs start addressing retail investors and HNWIs themselves, there will be multiple consequences in terms of distribution, but also in terms of processes. The common understanding is that this new source of capital for the alternatives industry will be reluctant to invest en masse, unless they have more visibility as to if and when they can redeem their investments. 

Open-ended, evergreen funds are quite often referred to. That will also have multiple consequences in terms of reporting towards this new category of investors, including more frequent valuations, from quarterly to monthly, or even different valuation methodologies. These valuations will also change in nature, from mostly a reporting topic to a topic that will have direct cash/performance impact. I believe that only a great collaboration between best-in-class technology and valuation consultants will be able to scale to address this significant increase in demand. 

RD: To what extent will information and transparency be a requirement to attract retail investors and HNWIs into private markets investing?

Magnan: The higher the transparency, the higher the likelihood of attracting retail investors and HNWIs towards alternatives. It is a question of trust, in the same way that public markets have been thriving on higher transparency and more in-depth reporting. 

Balkin: Retail investors and HNWIs will require more transparency and information from GPs to be effective investors in private markets. This is a shift from the way things have been done before, as larger institutional LPs often have the ability to interact with investment professionals at the GP, which will become increasingly difficult with a higher volume of investors. 

Retail and HNWIs will rely on comprehensive information to make informed investment decisions. They need access to data regarding investment opportunities, potential risks, expected returns and the underlying fundamentals of private companies or assets. Without sufficient information, investors may be hesitant to commit capital to illiquid and opaque investments typical of the private markets. 

RD: How has technology improved transparency in the investment landscape and how will it continue to do so? 

Magnan: Technology will be instrumental in helping collect data efficiently and in high volumes. Until reporting for private companies is standardised – which may or may not happen – there will be a need to create consistency across data and a portfolio. This is where technology, and in particular AI, will help significantly by providing better and faster analysis to encourage prompt investment decisions. 

Balkin: Technology has been a critical foundation for GPs to improve transparency in the investment landscape. It has allowed firms to establish the ‘facts’ of the business via valid sources that can be reported to current and prospective LPs, regulatory agencies, investment teams and firm leadership. For GPs continuing their innovation journey, the ability to automate business processes that have historically been manual and performed ‘offline’ has been an important trend we have witnessed. 

We’re seeing technology-driven data analytics and artificial intelligence tools as a key area of exploration for the purposes of analysing large datasets to identify trends, patterns and anomalies, and to continue automating inefficient business processes. These tools can help investors assess the quality of financial information, detect outliers and make more informed investment decisions. AI-powered algorithms can also automate the analysis of banker investment memos, credit agreements, regulatory filings or market research reports, providing investors with valuable insights and enhancing transparency. 

RD: What real-time data, market analysis and performance metrics should be accessible to retail investors and HNWIs? 

Magnan: I believe that besides getting valuations for their investments, retail investors and HNWIs will need to be informed of how the business and financial instruments they have invested in are performing, both on their own and compared to their peers. 

That means that GPs addressing retail investors’ and HNWIs’ interests must consistently collect and structure as many data points as possible to address these demands. This is something that 73 Strings have been focusing on for some time, and where we are seeing significant traction and growth. 

Balkin: We have seen this become a focus area for GPs, as large institutional investors have become more sophisticated and the need for real-time data has expanded. Instead of a quarterly report that represents the previous state of the portfolio, that information is increasingly required to be up to date and readily available. 

Whether it is the company financials, economic indicators, risk and exposure factors or benchmarking data showing peer funds’ performance, the shift to establishing this as a mature capability will be required. 

RD: How will technology streamline the investment process and how can semi-automated platforms, such as 73 Strings, assist GPs with portfolio management and valuation?

Magnan: Digital transformation is going to be a priority for most alternative asset managers. For example, at 73 Strings, our technology streamlines the entire valuation process of an alternative asset, equipping the GP with a technology that delivers valuations more efficiently and with greater consistency. 

With largely automated auditing and reviewing capabilities, the third-party valuation providers and auditors who remain key to the process can derive their conclusions for GPs faster. The automated data collection technology that 73 Strings has developed is also a significant enabler in running an efficient process as it aids the collection, structuring and tracking of the relevant data points and their data sources. 

Balkin: We see technology streamlining the investment process at all stages of its lifecycle, from the initial onboarding of investors and evaluation of investment opportunities to tracking dealflow in a pipeline management solution, to collecting financial data from portfolio companies and automating valuations. We have deployed 73 Strings’ technology to GPs and the resulting efficiency gains around portfolio monitoring activities and valuations have been significant.

RD: How do advancements in emerging technologies shape the future of alternative investing? 

Magnan: I am a firm believer that AI has transformational potential in the alternative industry. AI can help – and is already helping – to automate routine tasks, reporting and the structuring of data. 

It is also worth considering that the alternative investment industry is technical and the development and training of relevant algorithms will require specific resources and specific competencies. Additionally, the security of data, how it is used and its availability must be managed with care.

Balkin: Alternative and private fund managers have historically employed largely manual and inefficient business processes that could suffice for a small investor base and relatively low volume of assets and transactions. 

However, as volumes and competition increase, the opportunities to leverage technological innovations, such as AI, have become increasingly attractive. 

We have seen an initial focus on the investment diligence process as investment professionals are often reviewing a high volume of investment opportunities, with data, reports and documents requiring time-intensive analysis. 

AI has been able to accelerate that analysis through identification of key data from presentations and reports while correlating findings with market research data. Additionally, as a key challenge for GPs is collecting, organising and analysing financial data from portfolio companies, AI has been able to step in and automate the way in which data is ingested into platforms such as we’ve seen with 73 Strings.

This content was produced in association with 73 Strings - click here to find out more about 73 Strings on our Drawdown Service Provider Profile