Navigating Public to Private Investment Data Strategy
On this episode of Data Disruption, Ben and Kali discuss how to combat the challenges investors navigate while forming a public-to-private investment data strategy and how the right technology can be the differentiator to accelerate your business.
KALI JAKOBI:
Welcome to Data Disruption, a podcast all about data problems, solutions and innovations, disrupting the private markets. I’m your host, Kali Jakobi. Let’s talk data. Today I’m joined by Ben Shim to discuss data management across public and private markets. Ben, welcome to the show.
Ben Shim:
Thanks, Kali. Thanks for having me.
KALI JAKOBI:
Ben, go ahead and give us a little bit of background into your history at CRD and where you come from.
Ben Shim:
Sure. I’m a Director of Product Strategy at Charles River and I’m responsible for our front office and portfolio management side of the business. When you think about things like risk, analytics, ESG, private markets, basically anything that involves building the portfolio or overseeing the portfolio, that falls into my responsibility.
And just for more background, I’ve been in the FinTech space for about 20 years. Mainly been working with institutional investors and I’ve been helping them leverage technology and services to really build the scale and efficiencies they need, to really elevate their business.
And as a product strategist at Charles River, one of my main objectives is to help drive some of the key projects that are going on here, whether it’s around ESG or private markets, but also to work with our clients to really help them realize the vision and value proposition of what we’re doing across the business. And just on a personal background note, I am a very, unfortunately, a very avid Knicks fan, so I am always in a constant state of watching them be in mediocrity. But we can talk about that on a different podcast, otherwise I’ll go on a never ending rant.
KALI JAKOBI:
You’re used to some adversity, I guess, based off that interest.
Ben Shim:
It’s been a lifetime of adversity, so I’ve got thick skin.
KALI JAKOBI:
Oh, that’s a good thing to have in this business. Ben, let’s talk about how asset managers are controlling their investment data across public and private assets.
Ben Shim:
When I think about that, I think it’s kind of like a controlled chaos experiment. When you break it down, if I were to kind of help you visualize it, at the top level, you have public and private, but then even within the public space, you have fixed income and equity. And then let’s peel the onion some more. And then within fixed income you have global, EM, structured, credit, et cetera. And then within equities you have domestic, global, small cap, large cap, et cetera.
But then you get into privates and you have private equity, real estate, debt, et cetera. And then within private equity you have PE, VC, buyout, growth equity. There’s just so many different needs and objectives across that multi-asset spectrum. But at the end of the day, all of that data and processes, that needs to come together so you can effectively manage it on behalf of your clients or any of the other beneficiaries that you have there.
What we see all too often is that a lot of these different asset classes and sectors, they get paired with disparate point solutions and those aren’t necessarily well integrated. And when I say they create a solution, I’m saying solutions in air quotes, because at the end of the day, it may be a solution, but it adds a great deal of complexity and operational risk. But that’s a utopian scenario where there’s no challenges and complexities. The more realistic question is, what’s the easiest way to get to point A to point B, if I threw in 10 random dots as well? What you’d end up with is you don’t have a nice straight line anymore. You end up with this zigzag, Jackson Pollock type scenario where you have this complex solution and you’re probably spending a little too much on it.
When you think about it at a high level, regardless of asset class, you’ve got these managers that are utilizing different sets of tools to view their exposures, risk and KPIs. And I think at the end of the day, I think that’s where the importance of integration comes in. I’m not saying having different partners and solutions is a bad thing. I think if anything, using the best of breed, to meet the needs, is a good thing, because then you’re not compromising on a lesser solution for the sake of simplicity.
You may use a different provider for ESG, trading, analytics, et cetera. But again, at the end of the day, the most important question is, how well integrated is that data and how well integrated are those processes? Because I think without that integration, you end up with an organization to have this complex zigzagging dots. But with that integration, you end up lining up those 10 dots and you go back to that straight line solution that we were talking about.
KALI JAKOBI:
Yep. If you’re going with different providers, you got to have all of them talk to each other one way or the other, the data at least.
Ben Shim:
Exactly.
KALI JAKOBI:
Let’s talk about the last couple years of just global economic events, have been quite unprecedented in many ways. How have those impacted the technology buying process among asset managers and owners? How has that changed the landscape?
Ben Shim:
I think there’s two things that really stand out. I think one is the recent COVID pandemic and the other one’s not necessarily a shock, but I think it’s a trend that we’re seeing, where there’s a seismic shift towards private markets. And that’s a shift that we’ve been seeing happen in the recent years. But if I start with the first example, when you think about the COVID pandemic, back in 2020, and households and organizations went into full lockdown and you had a near 100% remote workforce, I think what that happened there is that it showed and it really differentiated companies that were investing in their technology and infrastructure versus the ones that weren’t. So you had processes like being able to share documents, store data, and extract that information or produce reports. I think that part got really greatly tested because the technology that was out there and the way of remote work, wasn’t really tested to be used at that level and scale before.
But then what you could see is those organizations that did invest in it, they were able to adapt very well and handle that shock and almost kind of work just as well as they did before. I think the thing that you see highlighted there is that having that technology, gives you the ability to adapt. And as you see at these additional economic or potential economic shocks coming, having that technology in place, really positions you to be proactive and have oversight over your organization, so you’re prepared for of those next large broad economic shocks, like what we saw back in 2020.
And then you see the importance of just being able to invest in these modern and scalable technologies, so having a data warehouse where you can centralize all your information, across different asset classes, but also, be able to access that data. Because at the end of the day, what’s the point of storing all your data if it’s really hard for you to get that data out in a way that makes sense?
What we’ve seen from that is a lot of organizations are now taking a hard look at how they’re structured and what infrastructure do they have in place so they’re able to handle the next shock and be able to be prepared from an operational and portfolio management component. And then the second one was about when we talked about private markets and the thing that comes to mind is just the report that we saw in 2022 from Preqin, where it highlighted back in 2015, private assets were about 4 trillion. And then if you look at 2021, they jumped to about 9 trillion and that number is expected to jump to about 18 trillion by 2026. When you look at that, I think you kind of look at some of the main factors that probably come to mind, and the first is pension funds. A lot of them are severely underfunded, so they’re looking at private markets to help increase returns and close the funding gap.
Second is investors are just looking for a new diversified and uncorrelated asset class to invest in outside of public markets. And then just also thirdly, it’s just a new source of alpha to help support portfolio returns. And I think with that increased focus in private markets, you’ve seen the need for the increase in technology to support that. If you look how private markets are supported today, a lot of that’s manual and document heavy, there’s still a ton of spreadsheets, emails and PDFs and that causes a lot of complexity.
I think what we’ve seen is in order to combat that, organizations are making a significant push to invest in technology and have technology be the solution to simplify some of these previously highly manual processes. But as you can see, then as they integrate private markets, they’re also looking to integrate across their public assets as well. The theme of public to private, multi-asset solutions also comes to play. These organizations understand now they can’t expect to just have these separate point solutions, but they need a platform that can cover the multi-asset space together. As they continue to move towards that multi-asset space, we’re going to continue to see the push towards the digitization of those workflows and the greater use of technology to streamline that.
KALI JAKOBI:
Let’s double click into those workflows specifically. I know a lot of clients, word of mouth is huge, to find what technology is working for who. But how do your clients use data management technology systems to help manage their end to end workflows?
Ben Shim:
It all starts with how’s that data integrated into just the workflows that are happening? At the end of the day, they want to be able to do more with less and be more efficient. I think a couple of the workflows that can highlight that is if you look at the order management process, some of the key questions that come to mind is, how is the data integrated into your tools, that you have an accurate snapshot of your portfolio with all the relevant analytics and KPIs that you need. You also can ask, how are you capturing all the exposures across your public to private or how are you measuring the overall enterprise risk of the portfolio? As you layer on data as well, then you have other data sets that you need to think about, so ESG has been a main topic that’s coming to the fold.
These organizations now need that ESG data well integrated so they can perform the proper filters and allocations to build their new ESG portfolios and products. And then you also see the inclusion of newer technologies by leveraging partners like Snowflake, that can accelerate how that data gets integrated and how it gets shared across the organization and across different partners and how it allows them to consume massive ESG data sets and then be able to integrate it with other platforms like Charles River.
And then when you think about portfolio rebalances that managers need to do, you also need to include benchmark data because you have to track your active exposures and be able to make those allocations needed to get your portfolio back in line. But there’s also other components. As you think about the process, as orders are raised, trades also need to happen. With trading, you also need a system that gives you the integration into the execution platforms, so that you understand what the price history is, what the order volume and depth is, and you need those key metrics.
As you get those key components of data, you need those fed into your overall ecosystem because these PMs, they need to be able to communicate with their traders, just to ensure that they’re having efficient execution. And the traders also need to be able to communicate to the PMs to indicate the status of those orders. And these are all different pieces of that data management puzzle, that just have to come together so that you have that fluid, straight line solution, rather than that kind of zigzag, Frankenstein solution, that potentially in air quotes, works, but is potentially slow and that’s going to be prone to errors.
And then the last component I’ll talk about is when you think about compliance, that’s another component that’s heavily reliant on data. You got orders that are raised and then you need to incorporate all the security and portfolio attributes. That becomes extremely important from the data management side. As you think about managing all the different components of the portfolio, the portfolio guidelines, you want to make sure you’re not breaching any of those guidelines. You need that data to be integrated into the platform so that the hundreds or thousands of portfolios that are being managed, all those attributes are being included within portfolio compliance and you can flag them and ensure that you’re not breaching any of your investment guidelines and can actively focus on managing your portfolio rather than worry about having to run into potential compliant breaches. I think when you think about how data comes into play, whether it’s through managing portfolios or thinking about the orders or to compliance, you can see how data and the integration of the data, just plays a critical role across the entire process.
KALI JAKOBI:
Ben, thanks for explaining how the data journey is across public to private in the workflow scenario is, but let’s go into scenario analysis. Can you talk to me specifically about what are the challenges for forward looking scenario analysis for managers of both public and private?
Ben Shim:
The challenge is in the question in and of itself. When you say forward looking, that implies some level of future casting, but no one has the crystal ball into what’s going to happen in the future. The best we can do there is just leverage the data that we have today and build plausible scenarios that can inform what might happen, so it can be prepared if and when that scenario does occur.
KALI JAKOBI:
Yeah. If we could have been prepared for COVID, that would’ve been great.
Ben Shim:
Yeah. But when you think about the challenges in building those scenarios, it takes on a number of different forms. If you look at the public asset space, these are the most established, have the most transparency to them, and they’re the best fitted models for forecasting. When you’re building future scenarios on public assets, you can leverage a lot of different components across historical shocks to look at what happened to markets and asset classes during a specific time period. So how much did the market indices across equities and rates, drop during the March 2020 draw down? Or what are the statistical deviations in market factors across those historical time periods? How much did the 10 year move or what was the 10 year, two standard deviation move? And then you could just build also hypothetical scenarios, so you could leverage the correlations across different factors and see what the implied move would be to your other shocks.
What happens if oil dropped by 50%? What does that mean to all the other factors in my portfolio? The main challenge with public assets, is just making sure you have the right models and the right scenario building tools so you can execute the strategies that you’re trying to build. Otherwise, you end up with garbage in, garbage out.
This is where having scenario building partners like MSCI or Contigo, can help streamline approaches to that and help build these robust scenarios. But when you think about the private asset side, that becomes a little bit more nuanced than public assets. Many private assets right now, they still have their own spreadsheet models and a number of assumptions that are applied to the spreadsheet models to come up with that valuation. When you think about these models, these are very idiosyncratic and the fact that they’re spreadsheet based, makes it a core challenge.
If I were to run a scenario for one asset, for a private asset, that’s not too complicated and if I were to run 10 scenarios, it becomes a little bit more complex. If I have hundreds of assets and then I’m trying to run it across tens or hundreds of scenarios, then it becomes almost unmanageable and too time consuming.
Again, this is where having technology to help build out those scenarios for private markets such as Charles River for Private Markets’ ModelSync tech, those are key value proposition there, really help drive and build these private market scenarios. And then you kind of see the multi-asset approach where you have partners like MSCI’s Mac Model where you can use that and get a multi asset perspective of what would it mean to your portfolio if you were to shock it across the entirety of your holdings. A lot of different components here, those are some of the key components of building the right scenarios for your portfolio.
KALI JAKOBI:
It’s almost as if you could turn your models into software with the right technology then that sets you up for a lot of success.
Ben Shim:
Yeah, no, absolutely. Technology gives you so many opportunities to really scale your business and create simplicity where there used to be complexity.
KALI JAKOBI:
Ben, tell us more about what you’re excited about in this area of digital transformation and asset management. We just talked about scenario analysis, so let’s forward look into the next 5, 10 years. I know just within the last two years a lot of things have changed and a lot of technologies have advanced out of necessity. Where do you see this going?
Ben Shim:
There’s a lot that I’m excited about over the next five years, but to keep it within the time limit, I’ll just name a few. As you know, last year we acquired Mercatus (now known as Charles River for Private Markets) and this really opened up the possibilities of what we could do from a true, multi-asset perspective. As we talked about the public to private and creating that true multi-asset experience for our clients, Charles River for Private Markets really gave us that jumpstart we needed to accelerate that strategy. I think what excites me as well is just being able to democratize private asset data and digitize all the manual workflows that are in the private market space.
I think this is going to provide a benefit for everyone. It’s just going to make private assets more transparent and more available and general partners will be able to provide that information to investors and investors are going to just have more information to track their holdings more effectively and be able to see those investments and be able to remove some of that shroud of mystery that surrounds private assets today.
And I think with Charles River, we’re well on our way to providing the market with that truly end to end, front to back, public to private solution that just covers it holistically. And I think that part is one of the things I’m really excited about. Another is that complete platform offering, so that’s an area of transformation. When I talk about Charles River for Private Markets, it’s all about integration. With the work that we’re doing to just seamlessly integrate the workflows and data from Charles River and State Street, we’re also working to build that fluid, multi-asset ecosystem. You’re seeing a transformation where previously disparate systems and data, are now being unified under one platform, so public and private assets, front, middle, and back, those are all coming together under one platform. And I think this allows organizations to leverage technology and to really simplify the complexity of managing multi-asset businesses.
As we continue to build out our platform, I’m really excited by the future of all the different deliverables we’re going to be bringing to the market, that’s going to help these organizations be even more effective at managing their portfolios. And I’ll end it with this one. While it’s still relatively early days, I think crypto and digital assets will also be an exciting area. And I’m not just referring to cryptocurrencies, because I think whenever someone hears crypto, they think like Bitcoin, Ethereum or Dogecoin. But I’m referring to more of the underlying technology that can be used within the broader financial perspective.
Leveraging blockchain technology and digital ledgers to expedite settlements across both public and private markets or tokenizing contracts and assets to facilitate transactions that were previously extremely document heavy. And I think there’s so much that can happen in this space and it’s always exciting to hear that there’s so many things happening within our own State Street Digital Assets Team. As you think about the digital and cryptos, I think that’s another area where I think there’s just so much growth and so much opportunity to disrupt the market. But there’s a lot of other things that I could mention, but I’ll just leave it at those three for now.
KALI JAKOBI:
It’s fantastic, Ben. Thank you. It’s got me excited for the next five years and it’ll be interesting to play this episode back and listen in on what we were right about and how much more we probably could have even said.
Ben Shim:
For sure. I think five years from now, who knows what the next new trends will be, but hopefully as we’re building out our strategy and we’re building out the products here, hopefully we continue to do what’s going to be most effective for our clients in the market.
KALI JAKOBI:
Awesome. Thanks so much, Ben, for joining us today. And thanks everyone for tuning in and listening. If you have any questions for Ben or I, feel free to reach out to me and I can get you connected. Thanks Ben for being on the show.
Ben Shim:
Thanks for having me.
KALI JAKOBI:
Thanks for listening to this episode of Data Disruption by Charles River. If you like what you heard, share and leave us a review. It helps others discover the show and I thank you for it. And if you’d like additional insights related to this conversation or others, go to our website at www.crd.com. Till next time.
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The material discussed is for informational purposes only. The views expressed in this material are the views of the author and are subject to change based on market and other conditions and factors, moreover, they do not necessarily represent the official views of Mercatus and/or State Street Corporation and its affiliates.