The author of this article argues that the dynamic environment of constantly emerging new opportunities makes it an exciting terrain, one that family offices can more easily and confidently navigate with the right technology.
Family offices’ interest in alternative assets such as private equity, credit, infrastructure, and real estate is an established fact. Even though they aren’t specifically an asset class as such, hedge funds remain important for their ability to follow strategies not always in the conventional toolbox. And as investment has gotten more complex and varied, so family offices and ultra-high net worth individuals require technology solutions to keep track of returns, liquidity, capital calls, and other matters. It’s no accident that the rise of alternatives has prompted a flourishing tech-driven cluster of platforms aimed at making it easier to enter the alternatives investment arena – iCapital, CAIS, Moonfare, to name just three.
In this article, Hank Boughner, CEO of Dynamo Software, talks about the need for technology to manage alternative investments, and why family offices must pay close attention. The editors of this news service are pleased to share these views and invite replies. Jump into the conversation! The usual editorial disclaimers apply. Email email@example.com
Alternative investments have become mainstream for the ultra-high net worth, with 81 percent of those surveyed by Ernst & Young in 2021 holding alternative investments. The broader high net worth audience is following suit, with EY’s report indicating that nearly half will invest in alternatives by 2024.
Family offices will find themselves ill-equipped without technology that maximizes the upsides of alternative investing. In its absence, there’s a dearth of advanced analysis and insights needed to evaluate strategic opportunities and simultaneously manage growing risk aversion since the Covid-19 pandemic.
For family offices to meet the changing dynamics, three considerations are key.
Research management tools
In recent years, more high-net-worth families have looked at alternatives such as private equity for return potential, and data shows that these moves have been rewarded. Investment firm Hamilton Lane said in a report that private assets have outperformed returns of listed equities, generating an additional 83 cents per dollar invested since 2017.
But, smart alternatives investing requires a substantial amount of due diligence to ensure that the “next big thing” stands up to scrutiny. There are sometimes limited windows for investment opportunity, and the need to quickly, yet completely assess opportunities is critical.
Most family offices don’t have an in-house investment team staffed with portfolio managers or analysts, yet they still need to capitalize on opportunities that enhance returns. Hiring outside consultants will provide the needed insight, but consultancy costs will be contrary to most family office’s principles of lean efficiency.
Technology-powered research tools provide a thorough and systematic way to evaluate opportunities and bring harmony to the chaos of disparate metrics. Continuous advances in automation and data analytics replicate the work of in-house data scientists and investment professionals, almost instantly. Finding “the good stuff” while remaining cost-conscious is entirely possible when powerful tools are leveraged.
Increased operational efficiency
General purpose tools such as Excel and Quickbooks are common in family offices, but their legacy use for collecting, organizing, and categorizing data or information makes inefficiency almost inherent. Moreover, categorizing and storing capital calls, K-1s, limited partner agreements, private placement memorandums, and other documents can be a nightmare. Try as they might, family offices can’t make standalone, siloed methods work effectively for the unique needs of alternative investments. The inefficiency bears real costs – both direct and indirect.
As the appetite for alternatives grows, piecemeal solutions don’t scale and exacerbate burdens on time with the increased need for manual workarounds. Tightly staffed family offices will either need to throw more personnel at the problem or be left with precious little time for more meaningful, high-value efforts.
“Solving” the problem with more staff still leaves inadequate technology to provide a holistic view of investments. Absent this, new vulnerabilities emerge when it comes to assessing the effectiveness of an alternatives investment strategy, which can ultimately compromise returns.
The problems don’t stop there. The inefficiencies of non-specialized technology open the door for data slippage during manual processes, security problems, and the inflexibility to change with the market. All these factors introduce their own set of added risks – and costs – to the picture.
Ensuring investment oversight
As the number of alternative investment deals and fund managers grow, so does the need for a single source of truth to understand if objectives are being met or not (and, to provide expedient and thoughtful answers when family members have questions). Private markets can move at a rapid pace, and the hot hand gets attention. This makes it even more prudent to balance emotion and urgency against data – in which the alternatives market presents more challenges.
Reporting for alternatives is often less transparent than traditional stock and bond portfolios, where the regulatory environment makes it possible to quickly access detailed information. It takes more due diligence to ascertain that the fundamental reasons for investing are present and remain intact. Family offices must keep a watchful eye on fees, risk management, and the acumen of the fund managers.
Whether running the investments in-house or using consultants to analyze investment performance, the ability to capture, organize, and transmit information is essential to good decision-making. Understanding the big picture is critical, but so are the micro-views. Family offices need the ability to dial into granular metrics as circumstances dictate. Strong monitoring and oversight are key to making an alternative investment program successful.
Incorporating alternatives into the strategic asset mix is rapidly becoming an attractive way for high-net-worth families to diversify and enhance returns. The dynamic environment of constantly-emerging new opportunities makes it an exciting terrain, one that family offices can more easily and confidently navigate with the right technology.
About the author:
Hank Boughner is the CEO of Dynamo Software, where he leads its management team and defines the long-term vision and strategy. He has more than 20 years of business, investment, and transaction experience within growth markets including technology, tech-enabled services, and financial technology and services.
This article was first featured in Family Wealth Report on August 19, 2022.